<PAGE> 1
As filed with the Securities and Exchange Commission on or about April 21, 1995
Securities Act Registration No. 2-73968
Investment Company Act Registration No. 811-3256
SECURITIES AND EXCHANGE COMMISSION
Washington D.C.
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. ______ [ ]
Post-Effective Amendment No. 20 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 21 [X]
(Check appropriate box or boxes)
STRONG ASSET ALLOCATION FUND, INC.
(Exact Name of Registrant as Specified in Charter)
100 HERITAGE RESERVE
MENOMONEE FALLS, WISCONSIN 53051
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (414) 359-3400
THOMAS P. LEMKE
STRONG CAPITAL MANAGEMENT, INC.
100 HERITAGE RESERVE
MENOMONEE FALLS, WISCONSIN 53051
(Name and Address of Agent for Service)
Copies to
SCOTT A. MOEHRKE
GODFREY & KAHN, S.C.
780 NORTH WATER STREET
MILWAUKEE, WISCONSIN 53202
Registrant has registered an indefinite amount of securities pursuant
to Rule 24f-2 under the Securities Act of 1933; the Registrant's Rule 24f-2
Notice for the fiscal year ended December 31, 1994 was filed on or about
January 27, 1995.
It is proposed that this filing will become effective (check
appropriate box).
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on May 1, 1995 pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new
effective date for a previously filed post-effective amendment.
<PAGE> 2
STRONG ASSET ALLOCATION FUND, INC.
CROSS REFERENCE SHEET
(Pursuant to Rule 481 showing the location in the Prospectus and the
Statement of Additional Information of the responses to the Items of Parts A
and B of Form N-1A.)
<TABLE>
<CAPTION>
CAPTION OR SUBHEADING IN PROSPECTUS OR
ITEM NO. ON FORM N-1A STATEMENT OF ADDITIONAL INFORMATION
--------------------- -----------------------------------
<S> <C>
PART A - INFORMATION REQUIRED IN PROSPECTUS
1. Cover Page Cover Page
2. Synopsis Expenses; Highlights
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Strong Growth and Income Funds; Investment
Objectives and Policies; Implementation of Policies
and Risks; About the Funds - Organization
5. Management of the Fund About the Funds - Management; Financial Highlights
5A. Management's Discussion of Fund Performance *
6. Capital Stock and Other Securities About the Funds - Organization, - Distributions and
Taxes; Shareholders Manual - Shareholder Services
7. Purchase of Securities Being Offered Shareholder Manual - How to Buy Shares, -
Determining Your Share Price, - Shareholder
Services
8. Redemption or Repurchase Shareholder Manual - How to Sell Shares, -
Determining Your Share Price, - Shareholder
Services
9. Pending Legal Proceedings Inapplicable
PART B - INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL
INFORMATION
10. Cover Page Cover page
11. Table of Contents Table of Contents
12. General Information and History **
13. Investment Objectives and Policies Investment Restrictions; Investment Policies and
Techniques
14. Management of the Fund Directors and Officers of the Fund
15. Control Persons and Principal Holders of Securities Principal Shareholders; Directors and Officers of
the Fund; Investment Advisor and Distributor
16. Investment Advisory and Other Services Investment Advisor and Distributor; About the Funds
- Management (in Prospectus); Custodian; Transfer
Agent and Dividend-Disbursing Agent; Independent
Accountants; Legal Counsel
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
CAPTION OR SUBHEADING IN PROSPECTUS OR
ITEM NO. ON FORM N-1A STATEMENT OF ADDITIONAL INFORMATION
--------------------- --------------------------------------
<S> <C>
17. Brokerage Allocation and Other Practices Portfolio Transactions and Brokerage
18. Capital Stock and Other Securities Included in Prospectus under the heading About the
Funds - Organization and in the Statement of
Additional Information under the headings
Fund Organization and Shareholder Meetings
19. Purchase, Redemption and Pricing of Securities Being Included in Prospectus under the headings:
Offered Shareholder Manual - How to Buy Shares, -
Determining Your Share Price, - How to Sell Shares,
- Shareholder Services; and in the Statement of
Additional Information under the headings:
Additional Shareholder Information; Investment
Advisor and Distributor; and Determination of Net
Asset Value
20. Tax Status Included in Prospectus under the heading About the
Funds - Distributions and Taxes; and in the
Statement of Additional Information under the
heading Taxes
21. Underwriters Investment Advisor and Distributor
22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statements
</TABLE>
* Complete answer to Item is contained in Registrant's Annual Report.
** Complete answer to Item is contained in Registrant's Prospectus.
<PAGE> 4
<PAGE> 1
Dated May 1, 1995
STRONG GROWTH AND INCOME FUNDS
STRONG ASSET ALLOCATION FUND, INC. STRONG FUNDS
STRONG AMERICAN UTILITIES FUND, INC. P.O. Box 2936
STRONG TOTAL RETURN FUND, INC. Milwaukee, Wisconsin 53201
Telephone: (414) 359-1400
Toll-Free: (800) 368-3863
Device for the Hearing-Impaired:
(800) 999-2780
The Strong Family of Funds ("Strong Funds") is a family of twenty-four
diversified and non-diversified, open-end management investment companies,
commonly called mutual funds. All of the Strong Funds are no-load funds. There
are no sales charges, redemption fees, or 12b-1 fees. Strong Funds include
growth funds, growth and income funds, income funds, municipal income funds, and
money market funds. The "Strong Growth and Income Funds" are described in this
Prospectus.
- ----------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- ----------------------------------------------------------------------------
This Prospectus contains information you should consider before you invest.
Please read it carefully and keep it for future reference. A Statement of
Additional Information for each Fund, dated May 1, 1995, contains further
information, is incorporated by reference into this Prospectus, and has been
filed with the Securities and Exchange Commission ("SEC"). These Statements,
which may be revised from time to time, are available without charge upon
request to the above-noted address or telephone number.
---------------------
PROSPECTUS PAGE I-1
<PAGE> 2
STRONG GROWTH AND INCOME FUNDS
Strong Asset Allocation Fund, Inc., Strong American Utilities Fund, Inc., and
Strong Total Return Fund, Inc. (collectively the "Funds") are separately
incorporated, diversified and non-diversified, open-end management investment
companies.
STRONG ASSET ALLOCATION FUND (formerly known as Strong Investment Fund) (the
"Asset Allocation Fund") seeks high total return consistent with reasonable risk
over the long term. The Fund allocates its assets globally among a diversified
portfolio of equity securities, bonds, and short-term fixed income securities.
STRONG AMERICAN UTILITIES FUND (the "American Utilities Fund") seeks total
return by investing for both income and capital growth. The Fund invests
primarily in the equity securities of public utility companies headquartered in
the United States.
STRONG TOTAL RETURN FUND (the "Total Return Fund") seeks high total return by
investing for capital growth and income. While the Fund normally emphasizes
equity investments, it may also invest in bonds and short-term fixed income
securities.
---------------------
PROSPECTUS PAGE I-2
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
EXPENSES................................ I-4
FINANCIAL HIGHLIGHTS.................... I-5
HIGHLIGHTS.............................. I-9
INVESTMENT OBJECTIVES AND POLICIES...... I-10
Comparing the Funds.............. I-11
Strong Asset Allocation Fund..... I-11
Strong American Utilities Fund... I-13
Strong Total Return Fund......... I-13
IMPLEMENTATION OF POLICIES AND RISKS.... I-14
ABOUT THE FUNDS......................... I-25
SHAREHOLDER MANUAL...................... II-1
APPENDIX A.............................. A-1
APPENDIX B.............................. B-1
</TABLE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and each Fund's
Statement of Additional Information, and if given or made, such information or
representations may not be relied upon as having been authorized by the Strong
Growth and Income Funds. This Prospectus does not constitute an offer to sell
securities in any state or jurisdiction in which such offering may not lawfully
be made.
---------------------
PROSPECTUS PAGE I-3
<PAGE> 4
EXPENSES
The following information is provided in order to help you understand the
various costs and expenses that you, as an investor in the Funds, will bear
directly or indirectly.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases............. NONE
Sales Load Imposed on Reinvested
Dividends................................. NONE
Deferred Sales Load......................... NONE
Redemption Fees............................. NONE
Exchange Fees............................... NONE
</TABLE>
There are certain charges associated with retirement accounts and with
certain other special shareholder services offered by the Funds. Additionally,
purchases and redemptions may also be made through broker-dealers or others who
may charge a commission or other transaction fee for their services. (See
"Shareholder Manual - How to Buy Shares" and "- How to Sell Shares.")
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<CAPTION>
Total
Management Other 12b-1 Operating
Fund Fees Expenses Fees Expenses
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Allocation .81% .42%* NONE 1.23%
American Utilities .75 .89 NONE 1.64
Total Return .80 .40* NONE 1.20
- ----------------------------------------------------------------------------
</TABLE>
* The Fund may use brokerage commission credits to pay certain expenses that
otherwise would require cash payments by the Fund. In all cases, such credits
have been immaterial in amount. The Advisor believes that this practice has
not resulted in any increase in the level of commissions paid by the Funds.
From time to time, the Funds' investment advisor, Strong Capital Management,
Inc. (formerly known as Strong/Corneliuson Capital Management, Inc.) (the
"Advisor"), may voluntarily waive its management fee and/or absorb certain
expenses for any of the Funds. The expenses specified in the table above are
based on actual expenses incurred for the year ended December 31, 1994. For
additional information concerning fees and expenses, see "About the Funds -
Management."
---------------------
PROSPECTUS PAGE I-4
<PAGE> 5
EXAMPLE. You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
Period (in years)
----------------------------
Fund 1 3 5 10
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Allocation $13 $39 $68 $149
American Utilities 17 52 89 194
Total Return 12 38 66 145
- ---------------------------------------------------------
</TABLE>
The Example is based on each Fund's "Total Operating Expenses" described
above. PLEASE REMEMBER THAT THE EXAMPLE SHOULD NOT BE CONSIDERED AS
REPRESENTATIVE OF PAST OR FUTURE EXPENSES AND THAT ACTUAL EXPENSES MAY BE HIGHER
OR LOWER THAN THOSE SHOWN. The assumption in the Example of a 5% annual return
is required by regulations of the SEC applicable to all mutual funds. The
assumed 5% annual return is not a prediction of, and does not represent, the
projected or actual performance of a Fund's shares.
FINANCIAL HIGHLIGHTS
The following annual Financial Highlights for each of the Funds has been
audited by Coopers & Lybrand L.L.P., independent certified public accountants.
Their report for the fiscal year ended December 31, 1994 is included in the
Annual Report of the Growth and Income Funds that is contained in each Fund's
Statement of Additional Information. The Financial Highlights for the Funds
should be read in conjunction with the Financial Statements and related notes
included in the Funds' Annual Report. Additional information about each Fund's
performance is contained in the Funds' Annual Report, which may be obtained
without charge by calling or writing Strong Funds. The following presents
information relating to a share of capital stock of each of the Funds,
outstanding for the entire period.
---------------------
PROSPECTUS PAGE I-5
<PAGE> 6
<TABLE>
<CAPTION>
STRONG ASSET ALLOCATION FUND
---------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
-------- -------- -------- -------- -------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD $ 19.06 $ 18.49 $ 19.68 $ 17.50 $ 18.41 $ 17.57 $ 17.60 $ 22.18 $ 20.12 $ 17.62
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Income 0.70 0.82 0.87 0.94 1.12 1.22 1.39 0.85 0.89 0.84
Net Realized
and
Unrealized
Gains
(Losses) on
Investments (0.99) 1.81 (0.25) 2.41 (0.65) 0.73 0.19 (0.70) 2.54 2.45
-------- -------- -------- -------- -------- ---------- ---------- -------- -------- --------
TOTAL FROM
INVESTMENT
OPERATIONS (0.29) 2.63 0.62 3.35 0.47 1.95 1.58 0.15 3.43 3.29
LESS
DISTRIBUTIONS
From Net
Investment
Income (0.70) (0.82) (0.87) (0.97) (1.38) (0.97) (1.38) (1.78) (0.95) (0.75)
From Net
Realized
Gains -- (1.24) (0.94) (0.20) -- (0.14) -- (2.95) (0.42) (0.04)
In Excess of
Net Realized
Gains (0.16) -- -- -- -- -- -- -- -- --
From Capital -- -- -- -- -- -- (0.23) -- -- --
-------- -------- -------- -------- -------- ---------- ---------- -------- -------- --------
TOTAL
DISTRIBUTIONS (0.86) (2.06) (1.81) (1.17) (1.38) (1.11) (1.61) (4.73) (1.37) (0.79)
-------- -------- -------- -------- -------- ---------- ---------- -------- -------- --------
NET ASSET VALUE,
END OF PERIOD $ 17.91 $ 19.06 $ 18.49 $ 19.68 $ 17.50 $ 18.41 $ 17.57 $ 17.60 $ 22.18 $ 20.12
====== ====== ====== ====== ====== ======== ======== ====== ====== ======
Total Return -1.5% +14.5% +3.2% +19.6% +2.8% +11.2% +9.2% -0.3% +17.6% +19.4%
Net Assets, End
of Period
(In Thousands) $248,647 $254,439 $208,368 $214,951 $203,562 $ 240,549 $ 256,089 $272,899 $339,405 $220,556
Ratio of Expenses
to Average
Net Assets 1.2% 1.2% 1.2% 1.3% 1.3% 1.3% 1.2% 1.1% 1.1% 1.1%
Ratio of Net
Investment
Income
to Average Net
Assets 3.8% 4.2% 4.4% 5.1% 6.1% 6.6% 7.5% 4.2% 4.7% 5.4%
Portfolio
Turnover Rate 359.7% 348.3% 320.4% 418.4% 319.6% 206.5% 426.2% 336.5% 80.4% 143.6%
</TABLE>
---------------------
PROSPECTUS PAGE I-6
<PAGE> 7
STRONG AMERICAN UTILITIES FUND
<TABLE>
<CAPTION>
1994 1993**
-------- --------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 10.19 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.46 0.18
Net Realized and Unrealized
Gains (Losses) on Investments (0.73) 0.27
-------- --------
TOTAL FROM INVESTMENT OPERATIONS (0.27) 0.45
LESS DISTRIBUTIONS
From Net Investment Income (0.46) (0.18)
From Net Realized Gains -- (0.05)
In Excess of Net Realized Gains -- (0.03)
-------- --------
TOTAL DISTRIBUTIONS (0.46) (0.26)
-------- --------
NET ASSET VALUE, END OF PERIOD $ 9.46 $ 10.19
======== ========
Total Return -2.6% +4.5%
Net Assets, End of Period
(In Thousands) $ 37,944 $ 32,457
Ratio of Expenses to Average
Net Assets 0.5% 0.0%*
Ratio of Expenses to Average Net
Assets Without Waivers and
Absorptions 1.6% 1.4%*
Ratio of Net Investment Income
to Average Net Assets 4.8% 5.6%*
Portfolio Turnover Rate 105.4% 178.6%*
</TABLE>
* Calculated on an annualized basis.
** Inception date is July 1, 1993. Total return is not annualized.
---------------------
PROSPECTUS PAGE I-7
<PAGE> 8
<TABLE>
<CAPTION>
STRONG TOTAL RETURN FUND
---------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
-------- -------- -------- -------- -------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD $ 24.30 $ 20.17 $ 20.24 $ 15.34 $ 17.72 $ 18.96 $ 18.37 $ 21.61 $ 19.56 $ 16.35
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Income 0.25 0.33 0.18 0.22 0.95 1.55 1.95 0.97 0.66 0.59
Net Realized
and
Unrealized
Gains
(Losses) on
Investments (0.59) 4.18 (0.08) 4.90 (2.19) (0.97) 0.85 0.61 3.13 3.40
-------- -------- -------- -------- -------- ---------- ---------- -------- -------- --------
TOTAL FROM
INVESTMENT
OPERATIONS (0.34) 4.51 0.10 5.12 (1.24) 0.58 2.80 1.58 3.79 3.99
LESS
DISTRIBUTIONS
From Net
Investment
Income (0.26) (0.33) (0.17) (0.22) (1.14) (1.31) (1.96) (1.65) (0.70) (0.58)
In Excess of
Net
Investment
Income (0.08) -- -- -- -- -- -- -- -- --
From Net
Realized
Gains -- -- -- -- -- (0.51) -- (3.17) (1.04) (0.20)
In Excess of
Net Realized
Gains -- (0.05) -- -- -- -- -- -- -- --
From Capital -- -- -- -- -- -- (0.25) -- -- --
-------- -------- -------- -------- -------- ---------- ---------- -------- -------- --------
TOTAL
DISTRIBUTIONS (0.34) (0.38) (0.17) (0.22) (1.14) (1.82) (2.21) (4.82) (1.74) (0.78)
-------- -------- -------- -------- -------- ---------- ---------- -------- -------- --------
NET ASSET VALUE,
END OF PERIOD $ 23.62 $ 24.30 $ 20.17 $ 20.24 $ 15.34 $ 17.72 $ 18.96 $ 18.37 $ 21.61 $ 19.56
======== ======== ======== ======== ======== ========= ========= ======== ======== ========
Total Return -1.4% +22.5% +0.6% +33.6% -7.1% +2.6% +15.6% +6.0% +20.0% +25.4%
Net Assets, End
of Period
(In Thousands) $606,814 $630,349 $587,873 $691,327 $646,579 $1,065,278 $1,005,192 $802,442 $518,760 $233,956
Ratio of Expenses
to Average
Net Assets 1.2% 1.2% 1.3% 1.4% 1.4% 1.2% 1.2% 1.1% 1.1% 1.1%
Ratio of Net
Investment
Income
to Average Net
Assets 1.1% 1.4% 0.9% 1.3% 5.4% 7.7% 10.1% 5.2% 4.3% 5.0%
Portfolio
Turnover Rate 290.4% 271.3% 371.8% 426.4% 312.3% 305.3% 281.1% 224.4% 153.5% 304.6%
</TABLE>
---------------------
PROSPECTUS PAGE I-8
<PAGE> 9
HIGHLIGHTS
INVESTMENT OBJECTIVES AND POLICIES
Each Fund has distinct investment objectives and policies. Each Fund seeks
total return consistent with its investment objective and policies. The
investment objective of each Fund is set forth under "Investment Objectives and
Policies."
IMPLEMENTATION OF POLICIES AND RISKS
Subject to certain limitations, each Fund may invest in foreign securities
and engage in foreign currency and derivative transactions, including options,
futures, and options on futures transactions. Each Fund may invest in repurchase
agreements, when-issued securities, and illiquid securities. The Asset
Allocation Fund may engage in substantial short-term trading, which may result
in high portfolio turnover rates. These investment practices and techniques
involve risks that are different in some respects from those associated with
similar funds that do not use them. The American Utilities Fund is a "non-
diversified" investment company, which means that it may invest a larger
proportion of its assets in the securities of a single issuer than diversified
funds. The Funds may invest in non-investment-grade debt obligations (commonly
called "junk bonds") within specified limits. (See "Implementation of Policies
and Risks.")
MANAGEMENT
The Advisor, Strong Capital Management, Inc., serves as investment advisor to
the Funds. The Advisor provides investment management services for mutual funds
and other investment portfolios representing assets of over $12 billion. W.H.
Reaves & Co., Inc. (the "Subadvisor") is the subadvisor for the American
Utilities Fund. (See "About the Funds - Management.")
PURCHASE AND REDEMPTION OF SHARES
You may purchase or redeem shares of a Fund at net asset value. There are no
redemption or 12b-1 charges. The net asset values change daily with the value of
each Fund's portfolio. You can locate the net asset value for a Fund in
newspaper listings of mutual fund prices under the "Strong Funds" heading. (See
"Shareholder Manual - How to Buy Shares" and "- How to Sell Shares.")
---------------------
PROSPECTUS PAGE I-9
<PAGE> 10
SHAREHOLDER SERVICES
Strong shareholder benefits include: telephone purchase, exchange, and
redemption privileges; professional representatives available 24 hours a day;
automatic investment, automatic dividend reinvestment, payroll direct deposit,
automatic exchange and systematic withdrawal plans; and a no-minimum investment
program. (See "Shareholder Manual - Shareholder Services.")
DIVIDENDS AND OTHER DISTRIBUTIONS
The policy of each Fund is to pay dividends from net investment income
quarterly and to distribute substantially all net realized capital gains
annually. (See "About the Funds - Distributions and Taxes.")
INVESTMENT OBJECTIVES AND POLICIES
The descriptions that follow are designed to help you choose the Fund that
best fits your investment objective. You may want to pursue more than one
objective by investing in more than one of the Funds or by investing in one of
the other Strong Funds, which are described in separate prospectuses. Each
Growth and Income Fund's investment objective is discussed below in connection
with the Fund's investment policies. Because of the risks inherent in all
investments, there can be no assurance that the Funds will meet their
objectives.
The Funds are each required or permitted to invest a substantial portion of
their assets in equity securities. Accordingly, each Fund's net asset value will
fluctuate based upon changes in the value of the securities in its portfolio.
Although they are considered conservative equity funds - meaning, each Fund's
net asset value is likely to be less volatile than that of a Fund invested
principally for growth of capital - each Growth and Income Fund's net asset
value is likely to fluctuate more than that of a fund invested principally for
income. The Funds, therefore, are not appropriate for investors' short-term
financial needs.
----------------------
PROSPECTUS PAGE I-10
<PAGE> 11
COMPARING THE FUNDS
The following chart is intended to distinguish the Funds and help you
determine their suitability for your investments.
<TABLE>
<CAPTION>
Maximum
Equity Bond Cash
Fund Range Range Position Focus
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Allocation 10-60% 20-60% 100%* Diversified
- ---------------------------------------------------------------------------
American Utilities 65-100% 0-35% 100%* Utility and
Energy Stocks
- ---------------------------------------------------------------------------
Total Return 60-100% 0-40% 40% Large-Cap and
Dividend-Paying
Stocks
- ---------------------------------------------------------------------------
</TABLE>
*Temporary defensive position only.
Each Fund has adopted certain fundamental investment restrictions that are
set forth in its Statement of Additional Information ("SAI"). Those
restrictions, a Fund's investment objective, and any other investment policies
identified as "fundamental" cannot be changed without shareholder approval. To
further guide investment activities, each Fund has also instituted a number of
non-fundamental operating policies, which are described throughout this
Prospectus and in the SAI. Although operating policies may be changed by a
Fund's Board of Directors without shareholder approval, a Fund will promptly
notify shareholders of any material change in operating policies.
Except as limited below, each Fund may invest in a diversified portfolio of
securities without regard to objective investment criteria, such as company
size, exchange listing, earnings history, or other factors. When selecting
securities, the Advisor will, except as otherwise limited below, be limited only
by its best judgment as to what will help achieve each Fund's investment
objective.
STRONG ASSET ALLOCATION FUND
The Asset Allocation Fund seeks high total return consistent with reasonable
risk over the long term. The Fund allocates its assets globally among a
diversified portfolio of equity securities, bonds, and short-term fixed income
securities.
Under normal market conditions, the Fund's net assets will be allocated
according to a benchmark of 40% equities, 40% bonds, and 20% short-term fixed
income securities. The Advisor intends to actively manage the Fund's assets,
maintaining a balance over time between investment opportunities and their
associated potential risks. In response to changing market and economic
conditions, the Advisor may reallocate the Fund's net assets among these asset
----------------------
PROSPECTUS PAGE I-11
<PAGE> 12
categories. Those allocations normally will be within the ranges indicated
below. However, in pursuit of total return, the Advisor may under-allocate or
over-allocate the Fund's net assets in a particular category. Furthermore, when
the Advisor determines that market conditions warrant adopting a temporary
defensive position, the Fund may invest without limitation in cash and short-
term fixed income securities.
ASSET-ALLOCATION CATEGORIES
<TABLE>
<CAPTION>
Percentage of Fund
Net Assets
--------------------
Category of Investment Benchmark Range
<S> <C> <C>
- -----------------------------------------------------------
Equities 40% 10-60%
Bonds 40% 20-60%
Short-Term Fixed Income Securities 20% 0-70%
- -----------------------------------------------------------
</TABLE>
Equity securities in which the Fund may invest include common stocks,
preferred stocks, and securities that are convertible into common stocks, such
as warrants and convertible bonds. Bonds purchased by the Fund will be primarily
investment-grade debt obligations, although the Fund may invest up to, but not
including, 35% of its total assets in non-investment-grade debt obligations.
(See "Implementation of Policies and Risks - Debt Obligations.")
The Fund also has the flexibility to take advantage of investment
opportunities around the world by investing in foreign securities. While the
Fund may invest without limitation in foreign securities, the Advisor does not
expect that, under normal market conditions, the Fund will invest more than 40%
of its total assets in foreign securities. Foreign investments involve risks not
normally found when investing in securities of U.S. issuers. (See
"Implementation of Policies and Risks - Foreign Securities and Currencies.")
Within the asset-allocation categories described above, the Advisor will
allocate the Fund's investments among countries, geographic regions, and
currencies in response to changing market and economic trends. In making
geographical allocations of investments, the Advisor will consider such factors
as the historical and prospective relationships among currencies and
governmental policies that influence currency-exchange rates, current and
anticipated interest rates, inflation levels, and business conditions within
various countries, as well as other macroeconomic, social, and political
factors. While there are no prescribed limits on the Fund's geographic
allocations, the Advisor anticipates that the Fund will generally invest in
issuers in industrialized countries and in major currencies, including the
United States, Canada, the countries of Western Europe, Japan, Australia, and
New Zealand. The Fund may also, however, invest in securities of issuers in
developing countries.
----------------------
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<PAGE> 13
STRONG AMERICAN UTILITIES FUND
The American Utilities Fund seeks total return by investing for both income
and capital growth.
The Fund normally will invest at least 65% of its total assets in the equity
securities of public utility companies headquartered in the United States.
Equity securities in which the Fund may invest include common stocks, preferred
stocks, and securities that are convertible into common stocks, such as warrants
and convertible bonds. Public utility companies include those engaged in the
manufacture, production, generation, transmission, sale and/or distribution of
water, gas, and electric energy, as well as those engaged in the communications
industry, including providers of telephone, telegraph, satellite, cable
television, microwave, and other communication facilities for the public,
excluding public broadcasting companies. (See "Implementation of Policies and
Risks - Public Utility Companies.")
The balance of the Fund, up to 35% of its total assets, may be invested in
any type of security, including debt obligations and equity securities of
companies in other industries. The Fund intends to use this allowance primarily
to invest in the equity securities of energy companies, which may compose up to
25% of the Fund's total assets. (See "Implementation of Policies and Risks -
Energy Companies.") Although the debt obligations in which it invests will be
primarily investment-grade, the Fund may invest up to 5% of its total assets in
non-investment-grade debt securities. (See "Implementation of Policies and Risks
- - Debt Obligations.")
The Fund may invest up to 15% of its total assets directly in the securities
of foreign issuers and may invest up to 35% of its total assets in foreign
securities in domestic markets through depositary receipts. See "Implementation
of Policies and Risks - Foreign Securities and Currencies" for the special risks
associated with foreign investments.
Under normal market conditions, the Fund expects to be fully invested in the
equity securities of companies in the public utility and energy industries.
However, when the Advisor or W.H. Reaves & Co., Inc. (the "Subadvisor")
determines that market conditions warrant a temporary defensive position, the
Fund may invest without limitation in cash and short-term fixed income
securities.
STRONG TOTAL RETURN FUND
The Total Return Fund seeks high total return by investing for capital growth
and income. Using a conservative approach to equity management, the Fund
emphasizes investments in large companies with steady or growing dividends. (See
"Implementation of Policies and Risks - Debt Obligations.")
The Fund may invest up to 5% of its assets in the securities of foreign
issuers, either through direct investment or depositary receipts. See
"Implementation of Policies and Risks - Foreign Currencies" for the special
risks associated with foreign investments.
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<PAGE> 14
IMPLEMENTATION OF POLICIES AND RISKS
In addition to the investment policies described above (and subject to
certain restrictions described below), the Funds may invest in some or all of
the following securities and may employ some or all of the following investment
techniques, some of which may present special risks as described below.
Presently, the Funds do not intend to engage in cross-trading. Each Fund may
also engage in reverse repurchase agreements and mortgage dollar roll
transactions. A more complete discussion of certain of these securities and
investment techniques and the associated risks is contained in each Fund's SAI.
DEBT OBLIGATIONS
IN GENERAL. The market value of all debt obligations is affected by changes
in the prevailing interest rates. The market value of such instruments generally
reacts inversely to interest rate changes. If the prevailing interest rates
decline, the market value of debt obligations generally increases. If the
prevailing interest rates increase, the market value of debt obligations
generally decreases. In general, the longer the maturity of a debt obligation,
the greater its sensitivity to changes in interest rates.
TYPES OF OBLIGATIONS. Debt obligations include (i) corporate debt securities,
including bonds, debentures, and notes; (ii) bank obligations, such as
certificates of deposit, banker's acceptances, and time deposits of domestic and
foreign banks and their subsidiaries and branches, and domestic savings and loan
associations (in amounts in excess of the insurance coverage (currently $100,000
per account) provided by the Federal Deposit Insurance Corporation); (iii)
commercial paper (including variable-amount master demand notes); (iv)
repurchase agreements; (v) loan interests; (vi) foreign debt obligations issued
by foreign issuers traded either in foreign markets or in domestic markets
through depositary receipts; (vii) convertible securities - debt obligations of
corporations convertible into or exchangeable for equity securities or debt
obligations that carry with them the right to acquire equity securities, as
evidenced by warrants attached to such securities, or acquired as part of units
of the securities; (viii) preferred stocks - securities that represent an
ownership interest in a corporation and that give the owner a prior claim over
common stock on the Company's earnings or assets; (ix) U.S. government
securities; (x) mortgage-backed securities, collateralized mortgage obligations,
and similar securities; and (xi) municipal obligations.
RATINGS. Investment-grade debt obligations include:
- - bonds or bank obligations that are rated in one of the four highest categories
of any nationally recognized statistical rating organization or "NRSRO" (e.g.,
BBB or higher by Standard & Poor's Ratings Group or "S&P");
- - U.S. government securities (as defined below);
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PROSPECTUS PAGE I-14
<PAGE> 15
- - commercial paper rated in one of the three highest ratings categories of any
NRSRO (e.g., A-3 or higher by S&P);
- - short-term bank obligations that are rated in one of the three highest
categories by any NRSRO (e.g., A-3 or higher by S&P) with respect to
obligations maturing in one year or less;
- - repurchase agreements involving investment-grade debt obligations; or
- - unrated obligations determined by the Advisor to be of comparable quality.
All ratings are determined at the time of investment. Any subsequent rating
downgrade of a debt obligation will be monitored by the Advisor to consider what
action, if any, a Fund should take consistent with its investment objective.
Securities rated in the fourth highest category (e.g., BBB by S&P), although
considered investment-grade, have speculative characteristics and may be subject
to greater fluctuations in value than higher-rated securities.
Non-investment-grade debt obligations include:
- - securities rated as low as C by S&P or their equivalents;
- - commercial paper rated as low as C by S&P or its equivalent; and
- - unrated debt securities judged to be of comparable quality by the Advisor.
HIGH-YIELD (HIGH-RISK) SECURITIES. The Total Return and American Utilities
Funds may invest up to 5% of their total assets and the Asset Allocation Fund
may invest up to, but not including, 35% of its total assets in non-
investment-grade debt obligations, also referred to as high-yield (high-risk)
securities or "junk bonds." These securities include those rated lower than
investment-grade and unrated securities of comparable quality. Although these
securities generally offer higher yields than investment-grade securities with
similar maturities, lower-quality securities involve greater risks, including
the possibility of default or bankruptcy. In general, they are regarded to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. Other potential risks associated with investing in high-
yield securities include:
- - substantial market-price volatility resulting from changes in interest rates,
changes in or uncertainty about economic conditions, and changes in the actual
or perceived ability of the issuer to meet its obligations;
- - greater sensitivity of highly leveraged issuers to adverse economic changes
and individual-issuer developments;
- - subordination to the prior claims of other creditors;
- - additional Congressional attempts to restrict the use or limit the tax and
other advantages of these securities; and
- - adverse publicity and changing investor perceptions about these securities.
As with any other asset in a Fund's portfolio, any reduction in the value of
such securities as a result of the factors listed above would be reflected in
the net asset value of the Fund. In addition, a Fund that invests in
lower-quality
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PROSPECTUS PAGE I-15
<PAGE> 16
securities may incur additional expenses to the extent it is required to seek
recovery upon a default in the payment of principal and interest on its
holdings. As a result of the associated risks, successful investments in
high-yield (high-risk) securities will be more dependent on the Advisor's credit
analysis than generally would be the case with investments in investment-grade
securities.
It is uncertain how the high-yield market will perform during a prolonged
period of rising interest rates. A prolonged economic downturn or a prolonged
period of rising interest rates could adversely affect the market for these
securities, increase their volatility, and reduce their value and liquidity. In
addition, lower-quality securities tend to be less liquid than higher-quality
debt securities because the market for them is not as broad or active. If market
quotations are not available, these securities will be valued in accordance with
procedures established by a Fund's Board of Directors. Judgment may, therefore,
play a greater role in valuing these securities. The lack of a liquid secondary
market may have an adverse effect on market price and a Fund's ability to sell
particular securities.
See Appendix B for information concerning the credit quality of the Asset
Allocation Fund's investments in debt obligations in 1994.
GOVERNMENT SECURITIES. U.S. government securities are issued or guaranteed by
the U.S. government or its agencies or instrumentalities. Securities issued by
the government include U.S. Treasury obligations, such as Treasury bills, notes,
and bonds. Securities issued by government agencies or instrumentalities
include, for example, obligations of the following:
- - the Federal Housing Administration, Farmers Home Administration, Export-Import
Bank of the United States, Small Business Administration, and the Government
National Mortgage Association, including GNMA pass-through certificates, whose
securities are supported by the full faith and credit of the United States;
- - the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the
Tennessee Valley Authority, whose securities are supported by the right of the
agency to borrow from the U.S. Treasury;
- - the Federal National Mortgage Association, whose securities are supported by
the discretionary authority of the U.S. government to purchase certain
obligations of the agency or instrumentality; and
- - the Student Loan Marketing Association, the Interamerican Development Bank,
and International Bank for Reconstruction and Development, whose securities
are supported only by the credit of such agencies.
Although the U.S. government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so. The U.S. government and its agencies and
instrumentalities do not guarantee the market value of their securities;
consequently, the value of such securities will fluctuate.
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<PAGE> 17
SHORT-TERM FIXED INCOME SECURITIES. Short-term fixed income securities in
which the Funds may invest include, but are not limited to, debt securities
issued or guaranteed by the U.S. government or its agencies or
instrumentalities, commercial paper, banker's acceptances, certificates of
deposit, and time deposits. The Funds may invest in obligations of domestic and
foreign banks and their subsidiaries and branches.
ZERO-COUPON, STEP-COUPON, AND PAY-IN-KIND SECURITIES. Each Fund may invest in
zero-coupon, step-coupon, and pay-in-kind securities. These securities are debt
securities that do not make regular cash interest payments. Zero-coupon and
step-coupon securities are sold at a deep discount to their face value.
Pay-in-kind securities pay interest through the issuance of additional
securities. Because such securities do not pay current cash income, the price of
these securities can be volatile when interest rates fluctuate. While these
securities do not pay current cash income, federal income tax law requires the
holders of zero-coupon, step-coupon, and pay-in-kind securities to include in
income each year the portion of the original issue discount (or deemed discount)
and other non-cash income on such securities accruing that year. In order to
qualify as a "regulated investment company" under the Internal Revenue Code and
avoid a certain excise tax, a Fund may be required to distribute a portion of
such discount and income and may be required to dispose of other portfolio
securities, which may occur in periods of adverse market prices, in order to
generate cash to meet these distribution requirements.
PUBLIC UTILITY COMPANIES (AMERICAN UTILITIES FUND)
Under normal market conditions, at least 65% of the American Utilities Fund's
total assets will be invested in the equity securities of public utility
companies headquartered in the United States. Accordingly, the Fund's
performance will depend in part on conditions in the public utility industry.
Stocks of public utility companies have traditionally been attractive to
conservative stock market investors because they have generally paid consistent
and above-average dividends. The Fund's investments in public utility securities
may or may not pay consistent and above-average dividends. Moreover, the
securities of public utility companies can still be affected by the risks of the
stock market, as well as factors specific to public utility companies.
Government regulation of public utility companies can limit their ability to
expand their businesses or to pass cost increases onto customers. Additionally,
companies providing power or energy-related services may also be affected by the
following factors: increases in fuel and other operating costs; high costs of
borrowing to finance capital construction during inflationary periods;
operational restrictions, increased costs, and delays associated with compliance
with environmental and nuclear safety regulations; the difficulties involved in
obtaining natural gas for resale or fuel for generating electricity at
reasonable prices; the risks associated with constructing and operating nuclear
power plants; the effects of
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PROSPECTUS PAGE I-17
<PAGE> 18
energy conservation; and the effects of regulatory changes. Some public utility
companies are facing increased competition, which may reduce their profits. All
of these factors are subject to rapid change, which may affect utility companies
independently from the stock market as a whole. Equity securities issued by
public utility companies tend to be more affected by changes in interest rates
than are the equity securities of other issuers and, therefore, may react to
such changes somewhat like debt instruments. (See "Debt Obligations" above.)
In accordance with its investment objective and its fundamental investment
restrictions, the Fund will normally concentrate its investments in the public
utility industry. This means that more than 25% of the value of the Fund's total
assets will normally be invested in the public utility industry. The Fund does
not have set policies to concentrate within any particular segment of the public
utilities industry; however, the Subadvisor generally emphasizes investments in
established electric utility, telephone, natural gas, and energy stocks with
sound financial structures.
Due to the Fund's concentration of investments in the public utility
industry, an investment in the Fund may be subject to greater fluctuations in
value than a Fund that does not concentrate its investments in a similar manner.
For example, as discussed above, certain economic factors or specific events may
exert a disproportionate impact upon the prices of equity securities of
companies within the public utilities industry relative to their impact on the
prices of securities of companies engaged in other industries. Additionally,
changes in the market price of the equity securities of a particular company
that occupies a dominant position in an industry may tend to influence the
market prices of other companies within the same industry. As a result of the
foregoing factors, the net asset value of the Fund may be more susceptible to
change than those of investment companies that diversify their investments over
many different industries.
ENERGY COMPANIES (AMERICAN UTILITIES FUND)
Under normal market conditions, the American Utilities Fund anticipates it
may invest a substantial portion, but not more than 25% of its total assets, in
the equity securities of energy companies. Energy companies are generally
defined as companies in the conventional areas of oil, gas, electricity, and
coal, as well as those involved in alternative sources of energy, such as
nuclear, geothermal, shale, and solar power. The business activities of energy
companies may include production, generation, refining, transmission,
transportation, marketing, control, or measurement of energy or energy fuels;
providing component parts or services to companies engaged in these energy
activities; energy research or experimentation; and environmental activities
related to the solution of energy problems, such as energy conservation and
pollution control. For purposes of this 25% investment limitation, energy
companies shall exclude companies that are also public utility companies.
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PROSPECTUS PAGE I-18
<PAGE> 19
To the extent the Fund makes significant investments in energy companies, the
Fund's performance will depend in part on conditions in the energy industry. The
securities of companies in the energy industry are subject to changes in value
and dividend yield that depend to a large extent on the price and supply of
energy fuels. Swift price and supply fluctuations of energy fuels may be caused
by events relating to international politics, energy conservation, the success
of exploration projects, currency exchange rate fluctuations, and tax and other
regulatory policies of various governments.
WHEN-ISSUED SECURITIES
Each Fund may invest without limitation in securities purchased on a when-
issued or delayed delivery basis. Although the payment and interest terms of
these securities are established at the time the purchaser enters into the
commitment, these securities may be delivered and paid for at a future date,
generally within 45 days. Purchasing when-issued securities allows a Fund to
lock in a fixed price or yield on a security it intends to purchase. However,
when a Fund purchases a when-issued security, it immediately assumes the risk of
ownership, including the risk of price fluctuation until the settlement date.
The greater a Fund's outstanding commitments for these securities, the
greater the exposure to potential fluctuations in the net asset value of a Fund.
Purchasing when-issued securities may involve the additional risk that the yield
available in the market when the delivery occurs may be higher or the market
price lower than that obtained at the time of commitment. Although a Fund may be
able to sell these securities prior to the delivery date, it will purchase
when-issued securities for the purpose of actually acquiring the securities,
unless, after entering into the commitment, a sale appears desirable for
investment reasons. When required by SEC guidelines, a Fund will set aside
permissible liquid assets in a segregated account to secure its outstanding
commitments for when-issued securities.
FOREIGN SECURITIES AND CURRENCIES
Each Fund may invest in foreign securities, either directly or through the
use of depositary receipts. (See "Investment Objectives and Policies.")
Depositary receipts are generally issued by banks or trust companies and
evidence ownership of underlying foreign securities. Foreign investments may
include other investment companies which may involve frequent or layered fees
and also are subject to limitations under the Investment Company Act of 1940
(the "1940 Act"). Foreign investments involve special risks, including:
- - expropriation, confiscatory taxation, and withholding taxes on dividends and
interest;
- - less extensive regulation of foreign brokers, securities markets, and issuers;
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PROSPECTUS PAGE I-19
<PAGE> 20
- - less publicly available information and different accounting standards;
- - costs incurred in conversions between currencies, possible delays in
settlement in foreign securities markets, limitations on the use or transfer
of assets (including suspension of the ability to transfer currency from a
given country), and difficulty of enforcing obligations in other countries;
and
- - diplomatic developments and political or social instability.
Foreign economies may differ favorably or unfavorably from the U.S. economy
in various respects, including growth of gross domestic product, rates of
inflation, currency depreciation, capital reinvestment, resource
self-sufficiency, and balance of payments positions. Many foreign securities are
less liquid and their prices more volatile than comparable U.S. securities.
Although the Funds generally invest only in securities that are regularly traded
on recognized exchanges or in over-the-counter markets, from time to time
foreign securities may be difficult to liquidate rapidly without adverse price
effects. Certain costs attributable to foreign investing, such as custody
charges and brokerage costs, are higher than those attributable to domestic
investing.
The Asset Allocation Fund may invest a significant portion of its assets in
the foreign securities of issuers in developing countries. The risks of foreign
investments are generally intensified for investments in developing countries.
Risks of investing in such markets include:
- - less social, political, and economic stability;
- - smaller securities markets and the lower trading volume, which may result in a
lack of liquidity and greater price volatility;
- - certain national policies that may restrict the Fund's investment
opportunities, including restrictions on investments in issuers or industries
deemed sensitive to national interests, or expropriation or confiscation of
assets or property, which could result in the Fund's loss of its entire
investment in that market; and
- - less developed legal structures governing private or foreign investment or
allowing for judicial redress for injury to private property.
In addition, brokerage commissions, custodial services, withholding taxes,
and other costs relating to investment in emerging markets generally are more
expensive than in the U.S. and certain more established foreign markets.
Economies in emerging markets generally are heavily dependent upon international
trade and, accordingly, have been and may continue to be affected adversely by
trade barriers, exchange controls, managed adjustments in relative currency
values, and other protectionist measures negotiated or imposed by the countries
with which they trade.
The Asset Allocation Fund may also invest a significant portion of its assets
in debt obligations issued or guaranteed by foreign governments or their
agencies, instrumentalities or political subdivisions, or by supranational
issuers (collectively, sovereign debt). Investment in sovereign debt involves
special
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PROSPECTUS PAGE I-20
<PAGE> 21
risks. Certain foreign countries, particularly developing countries, have
experienced, and may continue to experience, high rates of inflation, high
interest rates, exchange rate fluctuations, large amounts of external debt,
balance of payments and trade difficulties, and extreme poverty and
unemployment. The issuer of the debt or the governmental authorities that
control the repayment of the debt may be unable or unwilling to repay principal
or interest when due in accordance with the terms of such debt, and the Fund may
have limited legal recourse in the event of default.
Because most foreign securities are denominated in non-U.S. currencies, the
investment performance of the Asset Allocation Fund, and to a lesser extent the
other Funds, could be significantly affected by changes in foreign currency
exchange rates. The value of a Fund's assets denominated in foreign currencies
will increase or decrease in response to fluctuations in the value of those
foreign currencies relative to the U.S. dollar. Currency exchange rates can be
volatile at times in response to supply and demand in the currency exchange
markets, international balances of payments, governmental intervention,
speculation, and other political and economic conditions.
The Funds may purchase and sell foreign currency on a spot basis and may
engage in forward currency contracts, currency options, and futures transactions
for hedging or any other lawful purpose. (See "Derivative Instruments.")
DERIVATIVE INSTRUMENTS
Derivative instruments may be used by the Funds for any lawful purpose,
including hedging, risk management, or enhancing returns, but not for
speculation. Derivative instruments are securities or agreements whose value is
derived from the value of some underlying asset, for example, securities,
currencies, reference indexes, or commodities. Options, futures, and options on
futures transactions are considered derivative transactions. Derivatives
generally have investment characteristics that are based upon either forward
contracts (under which one party is obligated to buy and the other party is
obligated to sell an underlying asset at a specific price on a specified date)
or option contracts (under which the holder of the option has the right but not
the obligation to buy or sell an underlying asset at a specified price on or
before a specified date). Consequently, the change in value of a forward-based
derivative generally is roughly proportional to the change in value of the
underlying asset. In contrast, the buyer of an option-based derivative generally
will benefit from favorable movements in the price of the underlying asset but
is not exposed to corresponding losses due to adverse movements in the value of
the underlying asset. The seller of an option-based derivative generally will
receive fees or premiums but generally is exposed to losses due to changes in
the value of the underlying asset. Derivative transactions may include elements
of leverage and, accordingly, the fluctuation of the value of the derivative
transaction in relation to the underlying asset may be magnified. In addition to
options, futures, and options on futures transactions, derivative
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PROSPECTUS PAGE I-21
<PAGE> 22
transactions may include short sales against the box, in which a Fund sells a
security it owns for delivery at a future date; swaps, in which the two parties
agree to exchange a series of cash flows in the future, such as interest-rate
payments; interest-rate caps, under which, in return for a premium, one party
agrees to make payments to the other to the extent that interest rates exceed a
specified rate, or "cap"; and interest-rate floors, under which, in return for a
premium, one party agrees to make payments to the other to the extent that
interest rates fall below a specified level, or "floor." Derivative transactions
may also include forward currency contracts and foreign currency exchange-
related securities.
Derivative instruments may be exchange-traded or traded in over-the-counter
transactions between private parties. Over-the-counter transactions are subject
to the credit risk of the counterparty to the instrument and are less liquid
than exchange-traded derivatives since they often can only be closed out with
the other party to the transaction. When required by SEC guidelines, a Fund will
set aside permissible liquid assets or securities positions that substantially
correlate to the market movements of the derivative transactions in a segregated
account to secure its obligations under derivative transactions. In order to
maintain its required cover for a derivative transaction, a Fund may need to
sell portfolio securities at disadvantageous prices or times since it may not be
possible to liquidate a derivative position.
The successful use of derivative transactions by a Fund is dependent upon the
Advisor's ability to correctly anticipate trends in the underlying asset. To the
extent that a Fund is engaging in derivative transactions other than for hedging
purposes, the Fund's successful use of such transactions is more dependent upon
the Advisor's ability to correctly anticipate such trends, since losses in these
transactions may not be offset in gains in the Fund's portfolio or in lower
purchase prices for assets it intends to acquire. The Advisor's prediction of
trends in underlying assets may prove to be inaccurate, which could result in
substantial losses to a Fund. Hedging transactions are also subject to risks. If
the Advisor incorrectly anticipates trends in the underlying asset, a Fund may
be in a worse position than if no hedging had occurred. In addition, there may
be imperfect correlation between a Fund's derivative transactions and the
instruments being hedged.
MORTGAGE- AND ASSET-BACKED SECURITIES
Mortgage-backed securities represent direct or indirect participation in, or
are secured by and payable from, mortgage loans secured by real property, and
include single- and multi-class pass-through securities and collateralized
mortgage obligations. Such securities may be issued or guaranteed by U.S.
government agencies or instrumentalities or by private issuers, generally
originators and investors in mortgage loans, including savings associations,
mortgage bankers, commercial banks, investment bankers, and special purpose
entities (collectively, "private lenders"). Mortgage-backed securities issued by
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<PAGE> 23
private lenders may be supported by pools of mortgage loans or other
mortgage-backed securities that are guaranteed, directly or indirectly, by the
U.S. government or one of its agencies or instrumentalities, or they may be
issued without any governmental guarantee of the underlying mortgage assets but
with some form of non-governmental credit enhancement.
Asset-backed securities have structural characteristics similar to mortgage-
backed securities. However, the underlying assets are not first-lien mortgage
loans or interests therein; rather, they include assets such as motor vehicle
installment sales contracts, other installment loan contracts, home equity
loans, leases of various types of property, and receivables from credit card or
other revolving credit arrangements. Payments or distributions of principal and
interest on asset-backed securities may be supported by non-governmental credit
enhancements similar to those utilized in connection with mortgage-backed
securities.
The yield characteristics of mortgage- and asset-backed securities differ
from those of traditional debt securities. Among the principal differences are
that interest and principal payments are made more frequently on mortgage-and
asset-backed securities, usually monthly, and that principal may be prepaid at
any time because the underlying mortgage loans or other assets generally may be
prepaid at any time. As a result, if a Fund purchases these securities at a
premium, a prepayment rate that is faster than expected will reduce yield to
maturity, while a prepayment rate that is slower than expected will have the
opposite effect of increasing the yield to maturity. Conversely, if a Fund
purchases these securities at a discount, a prepayment rate that is faster than
expected will increase yield to maturity, while a prepayment rate that is slower
than expected will reduce yield to maturity. Accelerated prepayments on
securities purchased by a Fund at a premium also impose a risk of loss of
principal because the premium may not have been fully amortized at the time the
principal is prepaid in full. The market for privately issued mortgage- and
asset-backed securities is smaller and less liquid than the market for
government-sponsored mortgage-backed securities.
The Funds may invest in stripped mortgage- or asset-backed securities, which
receive differing proportions of the interest and principal payments from the
underlying assets. The market value of such securities generally is more
sensitive to changes in prepayment and interest rates than is the case with
traditional mortgage- and asset-backed securities, and in some cases such market
value may be extremely volatile. With respect to certain stripped securities,
such as interest-only ("IO") and principal-only ("PO") classes, a rate of
prepayment that is faster or slower than anticipated may result in a Fund
failing to recover all or a portion of its investment, even though the
securities are rated investment-grade.
SMALL COMPANIES
The Asset Allocation Fund may, from time to time, invest a substantial
portion of its assets in small companies. While smaller companies generally
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<PAGE> 24
have potential for rapid growth, investments in smaller companies often involve
greater risks than investments in larger, more established companies because
smaller companies may lack the management experience, financial resources,
product diversification, and competitive strengths of larger companies. In
addition, in many instances the securities of smaller companies are traded only
over-the-counter or on a regional securities exchange, and the frequency and
volume of their trading is substantially less than is typical of larger
companies. Therefore, the securities of smaller companies may be subject to
greater and more abrupt price fluctuations. When making large sales, the Fund
may have to sell portfolio holdings at discounts from quoted prices or may have
to make a series of small sales over an extended period of time due to the
trading volume of smaller company securities. Investors should be aware that,
based on the foregoing factors, an investment in the Fund may be subject to
greater price fluctuations than an investment in a fund that invests primarily
in larger, more established companies. The Advisor's research efforts may also
play a greater role in selecting securities for the Fund than in a fund that
invests in larger, more established companies.
DIVERSIFICATION
As a matter of fundamental policy, the Asset Allocation and Total Return
Funds are diversified investment companies. Pursuant to this policy, these Funds
may not, with respect to 75% of each Fund's total assets, purchase the
securities of any issuer if the purchase would cause more than 5% of the value
of the Fund's total assets to be invested in the securities of any one issuer
(other than U.S. government securities).
As a non-diversified fund, the American Utilities Fund is not subject to such
limitation. It may invest a larger portion of its assets in the securities of a
single issuer than diversified funds and, therefore, its shares may be subject
to greater fluctuations in value than diversified funds, particularly those that
invest in a broad range of industries and issuers. Because the Fund may invest
in a smaller number of individual issuers than diversified funds, an investment
in the Fund may present greater risk to an investor than an investment in a
diversified fund.
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in illiquid securities.
Illiquid securities are those securities that are not readily marketable,
including restricted securities and repurchase obligations maturing in more than
seven days. Certain restricted securities that may be resold to institutional
investors under Rule 144A under the Securities Act and Section 4(2) commercial
paper may be determined to be liquid under guidelines adopted by each Fund's
Board of Directors.
----------------------
PROSPECTUS PAGE I-24
<PAGE> 25
PORTFOLIO TURNOVER
Historical portfolio turnover rates for the Funds are listed under "Financial
Highlights." The annual portfolio turnover rate indicates changes in a Fund's
investments and may also be affected by sales of portfolio securities necessary
to meet cash requirements for redemption of shares. The turnover rate may vary
from year to year, as well as within a year. High turnover in any year will
result in the payment by a Fund of above-average transaction costs and could
result in the payment by shareholders of above-average amounts of taxes on
realized investment gains. The Asset Allocation and Total Return Funds each have
a wide investment scope and an active management investment policy. Their
portfolio turnover rates may be as much as 400% or more. Under normal market
conditions, it is anticipated that the rate of portfolio turnover of the
American Utilities Fund generally will not exceed 200%. These rates should not
be considered as limiting factors. The Asset Allocation Fund may engage in
substantial short-term trading, which involves significant risk and may be
deemed speculative. Such trading will result in a higher portfolio turnover rate
and correspondingly higher brokerage costs.
ABOUT THE FUNDS
MANAGEMENT
The Board of Directors of each Fund is responsible for managing its business
and affairs. Each of the Funds has entered into an investment advisory agreement
(collectively the "Advisory Agreements") with Strong Capital Management, Inc.
(the "Advisor"). Except for the advisory fee arrangements, the Advisory
Agreements are identical. Under the terms of these agreements, the Advisor
manages each Fund's investments and business affairs subject to the supervision
of each Fund's Board of Directors.
ADVISOR. The Advisor began conducting business in 1974. Since then, its
principal business has been providing continuous investment supervision for
individuals and institutional accounts, such as pension funds and profit-sharing
plans. The Advisor also acts as investment advisor for each of the mutual funds
within the Strong Family of Funds. As of March 31, 1995, the Advisor had over
$12 billion under management. The Advisor's principal mailing address is P.O.
Box 2936, Milwaukee, Wisconsin 53201. Mr. Richard S. Strong, the Chairman of the
Board of each Fund, is the controlling shareholder of the Advisor.
As compensation for its services, each Fund pays the Advisor a monthly
advisory fee based on a percentage of each Fund's average daily net asset value.
The annual rates are as follows: Asset Allocation and Total Return Funds, .85%
of the Fund's average daily net assets up to $35,000,000 and .80% of each Fund's
average daily net assets in excess of $35,000,000; and American
----------------------
PROSPECTUS PAGE I-25
<PAGE> 26
Utilities Fund, .75%. Such fees are in excess of fees paid by many other funds.
From time to time, the Advisor may voluntarily waive all or a portion of its
management fee and/or absorb certain Fund expenses without further notification
of the commencement or termination of such waiver or absorption. Any such waiver
or absorption will temporarily lower a Fund's overall expense ratio and increase
a Fund's overall return to investors.
SUBADVISORY AGREEMENT - AMERICAN UTILITIES FUND. Under a subadvisory
agreement between the Advisor and W.H. Reaves & Co., Inc. (the "Subadvisory
Agreement"), the Subadvisor, pursuant to the oversight and supervision of the
American Utilities Fund's Board of Directors and the Advisor, provides a
continuous investment program for the American Utilities Fund. Under the
Subadvisory Agreement, the Subadvisor is responsible for determining the
securities to be purchased and sold by the Fund and for executing those
transactions. However, the Advisor is responsible for managing the short-term
fixed income securities maintained by the Fund in the ordinary course of its
business, which are expected to equal approximately five to seven percent of the
Fund's total assets. As compensation for its services, the Advisor (not the
Fund) pays the Subadvisor a monthly fee at an annual rate of .50% on the first
$200 million of the Fund's average daily net assets plus 40% of the Advisor's
net management fee (after any waivers thereof) on that portion of the Fund's
average daily net assets in excess of $200 million except that the foregoing
percentage will be 50% on those average daily net assets between $1.0 billion
and $1.5 billion. The Subadvisor bears all of its own expenses in providing
subadvisory services to the Fund.
The Subadvisor began conducting business in 1961. Since then, its principal
business has been providing continuous investment supervision to institutional
investors such as corporations, corporate pension funds, employee savings plans,
foundations, and endowments. The Subadvisor is a Delaware corporation. Mr.
William H. Reaves is the controlling shareholder of the Subadvisor. As of March
31, 1995, the Subadvisor had over $1 billion under management. Its address is 30
Montgomery Street, Jersey City, New Jersey 07302.
The Subadvisor may also act as a broker for the American Utilities Fund. In
order for the Subadvisor to effect any portfolio transactions for the Fund on an
exchange, the commissions, fees, or other remuneration received by the
Subadvisor must be reasonable and fair compared to the commissions, fees, or
other remuneration paid to other brokers in connection with transactions
involving similar securities being purchased or sold on any exchange during a
comparable period of time. This standard would allow the Subadvisor to receive
no more than the remuneration that would be expected to be received by an
unaffiliated broker in a commensurate arm's-length transaction.
PORTFOLIO MANAGERS. The following individuals serve as portfolio managers for
the Strong Growth and Income Funds.
----------------------
PROSPECTUS PAGE I-26
<PAGE> 27
STRONG ASSET ALLOCATION FUND
BRADLEY C. TANK. Mr. Tank leads the Fund's investment team and allocates the
Fund's assets among equities, bonds, and short-term fixed income securities. In
addition, Mr. Tank co-manages the Fund's bond component. Before joining the
Advisor in June 1990, he spent eight years at Salomon Brothers, Inc., where he
was a fixed income specialist and, for the last six years, a vice president. Mr.
Tank received his B.A. in 1980 from the University of Wisconsin-Eau Claire and
his M.B.A. in 1982 from the University of Wisconsin-Madison, where he also
completed the Applied Securities Analysis Program. In addition to his Asset
Allocation Fund duties, Mr. Tank manages the Strong Short-Term Bond and
Government Securities Funds and chairs the Advisor's Fixed Income Investment
Committee.
Equity Component
ANTHONY L.T. CRAGG. Mr. Cragg co-manages the equity component of the Fund.
Mr. Cragg joined the Advisor in April 1993 to develop the Advisor's
international investment activities. During the prior seven years, he helped
establish Dillon, Read International Asset Management, where he was in charge of
Japanese, Asian, and Australian investments. A graduate of Christ Church, Oxford
University, Mr. Cragg began his investment career as an international investment
manager in 1980 at Gartmore, Ltd., where his tenure included assignments in
London, Hong Kong, and Tokyo. He has co-managed the Fund since December 1994 and
managed the Strong International Stock Fund since he joined the Advisor. He has
also managed the Strong Asia Pacific Fund since its inception in December 1993.
RONALD C. OGNAR. Mr. Ognar co-manages the equity component of the Fund. Mr.
Ognar, a Chartered Financial Analyst with more than 25 years of investment
experience, joined the Advisor in April 1993 after two years as a principal and
portfolio manager with RCM Capital Management. For approximately three years
prior to that, he was a portfolio manager at Kemper Financial Services in
Chicago. Mr. Ognar began his investment career in 1968 at LaSalle National Bank
in Chicago after serving two years in the U.S. Army. He received his bachelor's
degree in accounting from the University of Illinois in 1968. Mr. Ognar has
co-managed the Fund since December 1994. He has managed the Strong Growth Fund
since its inception in December 1993 and managed the Strong Total Return Fund
from April 1993 until October 1994, when Mr. Ian J. Rogers joined him as a
co-manager.
RICHARD S. STRONG. Mr. Strong co-manages the equity component of the Fund.
Mr. Strong founded the Advisor in 1974. He began his investment career at
Employers Insurance of Wausau in 1966, after receiving his master's degree in
finance from the University of Wisconsin-Madison that January. He received his
undergraduate degree in 1963 from Baldwin-Wallace College. Mr. Strong has
co-managed the Fund since December 1994. He has also managed the Strong
Discovery Fund since its inception in December 1987. In addition to his
----------------------
PROSPECTUS PAGE I-27
<PAGE> 28
role as a portfolio manager, he is currently the Chairman of the Board,
Director, Chief Investment Officer, and a member of the Advisor's Executive
Committee.
RICHARD T. WEISS. Mr. Weiss co-manages the equity component of the Fund. Mr.
Weiss joined the Advisor in 1991 from Chicago-based Stein Roe & Farnham, where
he began his career as a research analyst in 1975. He was named a portfolio
manager in 1981. Mr. Weiss attended Harvard Graduate School of Business
Administration, where he was awarded his M.B.A. in 1975, and the University of
Southern California, where he received his bachelor's degree in business
administration in 1973. Mr. Weiss has co-managed the Fund since December 1994.
He has also co-managed the Strong Opportunity and Common Stock Funds since 1991.
In addition, Mr. Weiss is a member of the Advisor's Executive Committee.
Bond Component
JEFFREY A. KOCH. Mr. Koch co-manages the bond component of the Fund. Mr. Koch
joined the Advisor as a portfolio manager and securities analyst in June 1989.
For a brief period prior to that, he was a market-maker clerk at Fossett
Corporation, a clearing firm. Mr. Koch earned his M.B.A. in Finance at
Washington University in St. Louis, Missouri in 1989. His undergraduate degree,
awarded in 1987, is from the University of Minnesota-Morris. Mr. Koch is also a
Chartered Financial Analyst. In 1991, Mr. Koch joined Bradley C. Tank as
co-portfolio manager of the Strong Advantage and Corporate Bond Funds, as well
as the Strong Short-Term Bond and Government Securities Funds. They managed the
four Funds together until 1993, when Mr. Koch assumed sole management
responsibility for the Strong Advantage and Corporate Bond Funds. Mr. Koch has
co-managed the bond component of the Fund since December 1994.
SHIRISH T. MALEKAR. Mr. Malekar co-manages the bond component of the Fund.
Mr. Malekar joined the Advisor in 1994. He was an international bond portfolio
manager at Pacific Investment Management Company in California for the previous
three years. Prior to that, he was a bond trader at Harris Bank in Chicago for
one year and a bond trader at PaineWebber Incorporated in New York and Tokyo for
more than two years. He has an M.S. in Management from the Massachusetts
Institute of Technology, an M.S. in Petroleum Engineering from the University of
Pittsburgh, and a B.S. in Chemical Engineering from the University of Bombay,
India. Mr. Malekar has co-managed the bond component of the Fund since December
1994. In addition, Mr. Malekar has managed the Strong Short-Term Global Bond and
International Bond Funds since their inception in March 1994.
Short-Term Component
JAY N. MUELLER. Mr. Mueller manages the Fund's short-term component. Mr.
Mueller joined the Advisor in September 1991 as a securities analyst and
----------------------
PROSPECTUS PAGE I-28
<PAGE> 29
portfolio manager. For four years prior to that, he was a securities analyst and
portfolio manager with R. Meeder & Associates of Dublin, Ohio. Mr. Mueller
received his bachelor's degree in economics in 1982 from the University of
Chicago. Mr. Mueller is also a Chartered Financial Analyst. Mr. Mueller has
managed the Fund's short-term component since 1993. He has also managed the
Strong Money Market and U.S. Treasury Money Funds since October 1991.
STRONG AMERICAN UTILITIES FUND
WILLIAM H. REAVES. Mr. Reaves, the Fund's senior co-manager, has been the
President and Chief Investment Officer, Portfolio Manager, and Utilities Analyst
of the Subadvisor since 1961. He has worked as a utilities analyst since 1946.
THOMAS R. WILLIAMS. Mr. Williams, a co-manager of the Fund, has been the
Executive Vice President, Portfolio Manager, and Utilities Analyst of the
Subadvisor since 1963. He has been a utilities analyst since 1950.
DOUGLAS S. ROBERTSON. Mr. Robertson, a co-manager of the Fund, has been the
Vice President, Portfolio Manager, and Utilities Analyst of the Subadvisor since
1987. For nine years prior to that, he was an Assistant Treasurer and Manager of
Treasury Operations for the Public Service Company of Colorado. Mr. Robertson
has been a utilities analyst since 1966.
WILLIAM A. FERER. Mr. Ferer, a co-manager of the Fund, has been the Vice
President, Portfolio Manager, and Energy Analyst of the Subadvisor since 1987.
He has worked as a securities analyst since 1971.
RONALD J. SORENSON. Mr. Sorenson, a co-manager of the Fund, has been the Vice
President and Portfolio Manager of the Subadvisor since 1987. For three years
prior to that, he was a Partner and Portfolio Manager of PVF Inc. For a two-year
period prior to that, Mr. Sorenson was the Chairman of the Board and Chairman of
the Investment Committee of The American Life Insurance Company of New York. Mr.
Sorenson has acted as President of RWS Energy Services, Chief Financial Officer
of Emerging Market Services A.G., Controller of Triad Holding Corporation S.A.,
and a C.P.A. for Arthur Young & Co.
STRONG TOTAL RETURN FUND
RONALD C. OGNAR. Information concerning Mr. Ognar is set forth above under
"Strong Asset Allocation Fund."
IAN J. ROGERS. In October 1994, Mr. Rogers joined Mr. Ognar as co-portfolio
manager of the Fund. Mr. Rogers has worked with Mr. Ognar as an equity analyst
since joining the Advisor in August 1993. Prior to joining the Advisor, Mr.
Rogers worked for seven years as an equity analyst with Kemper Financial
Services in Chicago. For approximately two years prior to that, he was an equity
analyst for Allstate Insurance. Mr. Rogers began his investment career in 1983
as an equity analyst for Comerica Bank in Detroit. He received his M.B.A. from
Central Michigan University in 1983 and his bachelor's degree in Business
Administration from Ferris State College in 1966.
----------------------
PROSPECTUS PAGE I-29
<PAGE> 30
TRANSFER AND DIVIDEND-DISBURSING AGENT
The Advisor, P.O. Box 2936, Milwaukee, Wisconsin 53201, also acts as
dividend-disbursing agent and transfer agent for the Funds. The Advisor is
compensated for its services based on an annual fee per account plus certain
out-of-pocket expenses. The fees received and the services provided as transfer
agent and dividend-disbursing agent are in addition to those received and
provided under the Advisory Agreements between the Advisor and the Funds.
DISTRIBUTOR
Strong Funds Distributors, Inc., P.O. Box 2936, Milwaukee, Wisconsin 53201,
an indirect subsidiary of the Advisor, acts as distributor of the shares of the
Funds.
ORGANIZATION
SHAREHOLDER RIGHTS. Each Fund is a Wisconsin corporation that is authorized
to issue shares of Common Stock and series and classes of series of shares of
Common Stock. Each share of the Funds has one vote, and all shares participate
equally in dividends and other capital gains distributions by the respective
Fund and in the residual assets of the respective Fund in the event of
liquidation. Certificates will be issued for shares held in your account only
upon your written request. You will, however, have full shareholder rights
whether or not you request certificates. Generally, the Funds will not hold an
annual meeting of shareholders unless required by the 1940 Act. Shareholders
have certain rights, including the right to call a meeting upon a vote of 10% of
a Fund's outstanding shares for the purpose of voting to remove one or more
directors or to transact any other business.
SHAREHOLDER PRIVILEGES. The shareholders of each Fund may benefit from the
privileges described in the "Shareholder Manual" (see Page II-1). However, each
Fund reserves the right, at any time and without prior notice, to suspend,
limit, modify, or terminate any of these privileges or their use in any manner
by any person or class.
PRINCIPAL SHAREHOLDER. As of March 31, 1995, Charles Schwab & Co., Inc.
("Schwab") owned of record approximately 26% of the American Utilities Fund.
Schwab's record ownership of greater than 25% of the Fund's shares may result in
it being deemed a controlling entity of the Fund.
DISTRIBUTIONS AND TAXES
PAYMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS. You may elect to have all your
dividends and capital gain distributions from a Fund automatically reinvested in
additional shares of that Fund or in shares of another Strong
----------------------
PROSPECTUS PAGE I-30
<PAGE> 31
Fund at the net asset value determined on the payment date. If you request in
writing that your dividends and other distributions be paid in cash, a Fund will
credit your bank account by Electronic Funds Transfer ("EFT") or issue a check
to you within five business days of the payment date. You may change your
election at any time by calling or writing Strong Funds. Strong Funds must
receive any such change 7 days (15 days for EFT) prior to a dividend or capital
gain distribution payment date in order for the change to be effective for that
payment. The policy of each Fund is to pay dividends from net investment income
quarterly and to distribute substantially all net realized capital gains and
gains from foreign currency transactions annually. Each Fund may make additional
distributions if necessary to avoid imposition of a 4% excise tax on
undistributed income and gains.
TAX STATUS OF DIVIDENDS AND OTHER DISTRIBUTIONS. You will be subject to
federal income tax at ordinary income tax rates on any dividends you receive
that are derived from investment company taxable income (consisting generally of
net investment income, net short-term capital gain, and net gains from certain
foreign currency transactions, if any). Distributions of net capital gain (the
excess of net long-term capital gain over net short-term capital loss), when
designated as such by a Fund, are taxable to you as long-term capital gains,
regardless of how long you have held your Fund shares. The Funds' distributions
are taxable in the year they are paid, whether they are taken in cash or
reinvested in additional shares, except that certain distributions declared in
the last three months of the year and paid in January are taxable as if paid on
December 31.
If a Fund's distributions exceed its investment company taxable income and
net capital gain in any year, as a result of currency-related losses or
otherwise, all or a portion of those distributions may be treated as a return of
capital to shareholders for tax purposes.
YEAR-END TAX REPORTING. After the end of each calendar year, you will receive
a statement (Form 1099) of the federal income tax status of all dividends and
other distributions paid (or deemed paid) during the year.
SHARES SOLD OR EXCHANGED. Your redemption of Fund shares may result in
taxable gain or loss to you, depending upon whether the redemption proceeds
payable to you are more or less than your adjusted cost basis for the redeemed
shares. Similar tax consequences generally will result from an exchange of Fund
shares for shares of another Strong Fund. If you purchase shares of a Fund
within thirty days before or after redeeming shares of the same Fund at a loss,
a portion or all of that loss will not be deductible and will increase the cost
basis of the newly purchased shares. If you redeem shares out of a retirement
account, you will be subject to withholding for federal income tax purposes
unless you transfer the distribution directly to an "eligible retirement plan."
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PROSPECTUS PAGE I-31
<PAGE> 32
BUYING A DISTRIBUTION. A distribution paid shortly after you have purchased
shares in a Fund will reduce the net asset value of the shares by the amount of
the distribution, which nevertheless will be taxable to you even though it
represents a return of a portion of your investment.
BACKUP WITHHOLDING. If you are an individual or certain other noncorporate
shareholder and do not furnish a Fund with a correct taxpayer identification
number, the Fund is required to withhold federal income tax at a rate of 31%
(backup withholding) from all dividends, capital gain distributions, and
redemption proceeds payable to you. Withholding at that rate from dividends and
capital gain distributions payable to you also is required if you otherwise are
subject to backup withholding. To avoid backup withholding, you must provide a
taxpayer identification number and state that you are not subject to backup
withholding due to the underreporting of your income. This certification is
included as part of your application. Please complete it when you open your
account.
TAX STATUS OF THE FUNDS. Each Fund intends to continue to qualify for
treatment as a regulated investment company under Subchapter M of the Internal
Revenue Code and, if so qualified, will not be liable for federal income tax on
earnings and gains distributed to its shareholders in a timely manner.
This section is not intended to be a full discussion of present or proposed
federal income tax law and its effects on the Funds and investors therein. See
the SAI for a further discussion. There may be other federal, state, or local
tax considerations applicable to a particular investor. You are therefore urged
to consult your own tax advisor.
PERFORMANCE INFORMATION
Each Fund may advertise "average annual total return," "total return," and
"cumulative total return." The American Utilities Fund may also advertise
"yield." Each of these figures is based upon historical results and does not
represent the future performance of a Fund.
Average annual total return and total return figures measure both the net
investment income generated by, and the effect of any realized and unrealized
appreciation or depreciation of, the underlying investments in a Fund assuming
the reinvestment of all dividends and distributions. Total return figures are
not annualized and simply represent the aggregate change of a Fund's investments
over a specified period of time.
Yield is an annualized figure, which means that it is assumed that a Fund
generates the same level of net investment income over a one-year period. The
American Utilities Fund's yield is a measure of the net investment income per
share earned by the Fund over a specific one-month period and is shown as a
percentage of the net asset value of the Fund's shares at the end of the period.
----------------------
PROSPECTUS PAGE I-32
<PAGE> 33
SHAREHOLDER MANUAL
<TABLE>
<S> <C>
HOW TO BUY SHARES...................... II-1
DETERMINING YOUR SHARE PRICE........... II-5
HOW TO SELL SHARES..................... II-6
SHAREHOLDER SERVICES................... II-8
REGULAR INVESTMENT PLANS............... II-10
SPECIAL SITUATIONS..................... II-12
</TABLE>
HOW TO BUY SHARES
All the Strong Funds are 100% no-load, meaning you may purchase, redeem, or
exchange shares directly at net asset value without paying a sales charge.
Because the Funds' net asset values change daily, your purchase price will be
the next net asset value determined after Strong receives and accepts your
purchase order.
Whether you are opening a new account or adding to an existing one, Strong
provides you with several methods to buy Fund shares.
----------------------
PROSPECTUS PAGE II-1
<PAGE> 34
<TABLE>
<S> <C>
TO OPEN A NEW ACCOUNT
- ------------------------------------------------------------------------------
MAIL BY CHECK
- Complete and sign the application. Make your check
or money order payable to "Strong Funds."
- Mail to Strong Funds, P.O. Box 2936, Milwaukee,
Wisconsin 53201. If you're using an express delivery
service, send to Strong Funds, 100 Heritage
Reserve, Menomonee Falls, Wisconsin 53051.
BY EXCHANGE
- Call 1-800-368-3863 for instructions on
establishing an account with an exchange by mail.
- ------------------------------------------------------------------------------
TELEPHONE BY EXCHANGE
- Call 1-800-368-3863 to establish a new account by
1-800-368-3863 exchanging funds from an existing Strong Funds
24 HOURS A DAY, account.
7 DAYS A WEEK - Sign up for telephone exchange services when you
open your account. To add the telephone exchange
option to your account, call 1-800-368-3863 for a
Telephone Exchange Form.
- Please note that your accounts must be identically
registered and that you must exchange enough into the
new account to meet the minimum initial investment.
- ------------------------------------------------------------------------------
IN PERSON - Stop by our Investor Center in Menomonee Falls,
Wisconsin. Call 1-800-368-3863 for hours and
directions.
- The Investor Center can only accept checks or money
orders.
- ------------------------------------------------------------------------------
WIRE Call 1-800-368-3863 for instructions on opening an
account by
wire.
- ------------------------------------------------------------------------------
AUTOMATICALLY USE STRONG'S "NO-MINIMUM INVESTMENT PROGRAM."
- If you sign up for Strong's Automatic Investment
Plan when you open your account, Strong Funds will
waive the Fund's minimum initial investment (see
chart below).
- Complete both the Automatic Investment Plan
application at the back of this Prospectus and the
new account application.
- Mail to the address indicated on the application.
- ------------------------------------------------------------------------------
BROKER-DEALER - You may purchase shares in a Fund through a
broker-dealer or other institution that may charge
a transaction fee.
- Strong Funds may only accept requests to purchase
shares into a broker-dealer street name account
from the broker-dealer.
</TABLE>
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PROSPECTUS PAGE II-2
<PAGE> 35
TO ADD TO AN EXISTING ACCOUNT
- --------------------------------------------------------------------------------
BY CHECK
- - Complete an Additional Investment Form provided at the bottom of your account
statement, or write a note indicating your fund account number and
registration. Make your check or money order payable to "Strong Funds."
- - Mail to Strong Funds, P.O. Box 2936, Milwaukee, Wisconsin 53201. If you're
using an express delivery service, send to Strong Funds, 100 Heritage Reserve,
Menomonee Falls, Wisconsin 53051.
BY EXCHANGE
- - Call 1-800-368-3863 for instructions on exchanging by mail.
- --------------------------------------------------------------------------------
BY EXCHANGE
- - Add to an account by exchanging funds from another Strong Funds account.
- - Sign up for telephone exchange services when you open your account. To add the
telephone exchange option to your account, call 1-800-368-3863 for a Telephone
Exchange Form.
- - Please note that the accounts must be identically registered and that the
minimum exchange is $50 or the balance of your account, whichever is less.
BY TELEPHONE PURCHASE
- - Complete the Request for Telephone Purchase Form at the back of this
Prospectus to make additional investments from $50 to $25,000 into your Strong
Funds account by telephone.
Or use Strong Direct(SM), Strong Funds' automated telephone response system.
Call 1-800-368-3863 for details.
- --------------------------------------------------------------------------------
- - Stop by our Investor Center in Menomonee Falls, Wisconsin. Call 1-800-368-3863
for hours and directions.
- - The Investor Center can only accept checks or money orders.
- --------------------------------------------------------------------------------
Call 1-800-368-3863 for instructions on adding to an account by wire.
- --------------------------------------------------------------------------------
USE ONE OF STRONG'S AUTOMATIC INVESTMENT PROGRAMS. Sign up for these services
when you open your account, or call 1-800-368-3863 for instructions on how to
add them to your existing account.
- - AUTOMATIC INVESTMENT PLAN. Make regular, systematic investments (minimum $50)
into your Strong Funds account from your bank checking or NOW account. We've
included an application at the back of this Prospectus.
- - AUTOMATIC EXCHANGE PLAN. Make regular, systematic exchanges (minimum $50) from
one Strong Funds account to another. Call 1-800-368-3863 for an application.
- - PAYROLL DIRECT DEPOSIT. Have a specified amount (minimum $50) regularly
deducted from your paycheck, social security check, military allotment, or
annuity payment invested directly into your Strong Funds account. Call
1-800-368-3863 for an application.
- - AUTOMATIC DIVIDEND REINVESTMENT. Unless you choose otherwise, all your
dividends and capital gain distributions will be automatically reinvested in
additional Fund shares. Or, you may elect to have your dividends and capital
gain distributions automatically reinvested in shares of another Strong Fund.
- --------------------------------------------------------------------------------
- - You may purchase additional shares in a Fund through a broker-dealer or other
institution that may charge a transaction fee.
- - Strong Funds may only accept requests to purchase additional shares into a
broker-dealer street name account from the broker-dealer.
----------------------
PROSPECTUS PAGE II-3
<PAGE> 36
WHAT YOU SHOULD KNOW ABOUT BUYING SHARES
- - Please make all checks or money orders payable to "Strong Funds."
- - We cannot accept third-party checks or checks drawn on banks outside the U.S.
- - You will be charged a $20 service fee for each check, wire, or Electronic
Funds Transfer ("EFT") purchase that is returned unpaid, and you will be
responsible for any resulting losses suffered by a Fund.
- - Further documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact.
- - A Fund may decline to accept your purchase order upon receipt when, in the
judgment of the Advisor, it would not be in the best interests of the existing
shareholders.
- - The exchange privileges are available in all 50 states because all Strong
Funds intend to continue to qualify their shares for sale in all 50 states.
- - Minimum Investment Requirements:
To open a regular account
Total Return and Asset Allocation Funds...........................$250
American Utilities Fund.........................................$1,000
To open an IRA, Defined Contribution, or UGMA/UTMA account............$250
To open a 401(k) or 403(b) retirement account...................No Minimum
To add to an existing account..........................................$50
The Funds offer a No-Minimum Investment Program that waives the minimum
initial investment requirements for investors who participate in the Strong
Automatic Investment Plan (described on page II-11). Unless you participate in
the Strong No-Minimum Investment Program, please ensure your purchases meet the
minimum investment requirements.
Under certain circumstances (for example, if you discontinue a No-Minimum
Investment Program before you reach a Fund's minimum initial investment), each
Fund reserves the right to close your account. Before taking such action, a Fund
will provide you with written notice and at least 60 days in which to reinstate
an investment program or otherwise reach the minimum initial investment
required.
WHAT YOU SHOULD KNOW ABOUT BUYING SHARES
THROUGH A BROKER-DEALER
- - If you purchase shares through a program of services offered or administered
by a broker-dealer, financial institution, or other service provider, you
should read the program's materials, including information relating to fees,
in connection with a Fund's Prospectus. Certain features of a Fund may not
----------------------
PROSPECTUS PAGE II-4
<PAGE> 37
be available or may be modified in connection with the program of services
provided.
- - Certain broker-dealers, financial institutions, or other service providers
that have entered into an agreement with the Distributor may enter purchase
orders on behalf of their customers by phone, with payment to follow within
several days as specified in the agreement. The Funds may effect such purchase
orders at the net asset value next determined after receipt of the telephone
purchase order. It is the responsibility of the broker-dealer, financial
institution, or other service provider to place the order with the Funds on a
timely basis. If payment is not received within the time specified in the
agreement, the broker-dealer, financial institution, or other service provider
could be held liable for any resulting fees or losses.
DETERMINING YOUR SHARE PRICE
Generally, when you make any purchases, sales, or exchanges, the price of
your shares will be the net asset value ("NAV") next determined after Strong
Funds receives your request in proper form. If Strong Funds receives such
request prior to the close of the New York Stock Exchange (the "Exchange") on a
day on which the Exchange is open, your share price will be the NAV determined
that day. The NAV for each Fund is normally determined as of 3:00 p.m. Central
Time ("CT") each day the Exchange is open. The Funds reserve the right to change
the time at which purchases, redemptions, and exchanges are priced if the
Exchange closes at a time other than 3:00 p.m. CT or if an emergency exists.
Each Fund's NAV is calculated by taking the fair value of a Fund's total assets,
subtracting all its liabilities, and dividing by the total number of shares
outstanding. Expenses are accrued daily and applied when determining the net
asset value.
A Fund's portfolio securities are valued based on market quotations or at
fair value as determined by the method selected by each Fund's Board of
Directors. Equity securities traded on a national securities exchange or NASDAQ
are valued at the last sales price on the national securities exchange or NASDAQ
on which such securities are primarily traded. Securities traded on NASDAQ for
which there were no transactions on a given day or securities not listed on an
exchange or NASDAQ are valued at the average of the most recent bid and asked
prices. Other exchange traded securities (generally foreign securities) will be
valued based on market quotations. Debt securities are valued by a pricing
service that utilizes electronic data processing techniques to determine values
for normal institutional-sized trading units of debt securities without regard
to sale or bid prices when such values are believed to more accurately reflect
the fair market value for such securities. Otherwise, sale or bid prices are
used. Any securities or other assets for which market quotations are not readily
available are valued at fair value as determined in good faith by the Board of
Directors. Debt securities having remaining maturities of 60 days or less when
purchased are valued by the amortized cost method when the
----------------------
PROSPECTUS PAGE II-5
<PAGE> 38
Board of Directors determines that the fair value of such securities is their
amortized cost. Under this method of valuation, a security is initially valued
at its acquisition cost, and thereafter, amortization of any discount or premium
is assumed each day, regardless of the impact of the fluctuating rates on the
market value of the instrument.
Securities quoted in foreign currency are valued daily in U.S. dollars at the
foreign currency exchange rates that are prevailing at the time the daily net
asset value per share is determined. Although the Funds value their foreign
assets in U.S. dollars on a daily basis, they do not intend to convert their
holdings of foreign currencies into U.S. dollars on a daily basis. Foreign
currency exchange rates are generally determined prior to the close of trading
on the Exchange. Occasionally, events affecting the value of foreign investments
and such exchange rates occur between the time at which they are determined and
the close of trading on the Exchange. Such events would not normally be
reflected in a calculation of a Fund's net asset value on that day. If events
that materially affect the value of a Fund's foreign investments or the foreign
currency exchange rates occur during such period, the investments will be valued
at their fair value as determined in good faith by or under the direction of the
Board of Directors.
HOW TO SELL SHARES
You can access the money in your account at any time by selling (redeeming)
some or all of your shares back to the Fund. Once your redemption request is
received in proper form, Strong will normally mail you the proceeds the next
business day and, in any event, no later than seven days thereafter.
To redeem shares, you may use any of the methods described in the chart
below. However, if you are selling shares in a retirement account, please call
1-800-368-3863 for instructions. Please note that there is a $10.00 fee for
closing an IRA or other retirement account or for transferring assets to another
custodian. For your protection, certain requests may require a signature
guarantee.
----------------------
PROSPECTUS PAGE II-6
<PAGE> 39
<TABLE>
<S> <C>
TO SELL SHARES
- ----------------------------------------------------------------------------
MAIL FOR INDIVIDUAL, JOINT TENANT, AND UGMA/UTMA ACCOUNTS
- Write a "letter of instruction" that includes the
following information: your account number, the
dollar amount or number of shares you wish to
redeem, each owner's name, your street address, and
the signature of each owner as it appears on the
account.
- Mail to Strong Funds, P.O. Box 2936, Milwaukee,
Wisconsin 53201. If you're using an express delivery
service, send to 100 Heritage Reserve, Menomonee
Falls, Wisconsin 53051.
FOR TRUST ACCOUNTS
- Same as above. Please ensure that all trustees sign
the letter of instruction.
FOR OTHER REGISTRATIONS
- Call 1-800-368-3863 for instructions.
- ----------------------------------------------------------------------------
TELEPHONE Sign up for telephone redemption services when you
open your account by checking the "Yes" box in the
1-800-368-3863 appropriate section of the account application. To
24 HOURS A DAY, add the telephone redemption option to your account,
7 DAYS A WEEK call 1-800-368-3863 for a Telephone Redemption Form.
Once the telephone redemption option is in place, you
may sell shares ($500 minimum) by phone and arrange
to receive the proceeds in one of three ways:
TO RECEIVE A CHECK BY MAIL
- At no charge, we will mail a check to the address
to which your account is registered.
TO DEPOSIT BY EFT
- At no charge, we will transmit the proceeds by
Electronic Funds Transfer (EFT) to a pre-authorized
bank account. Usually, the funds will arrive at
your bank two banking days after we process your
redemption.
TO DEPOSIT BY WIRE
- For a $10 fee, we will transmit the proceeds by
wire to a pre-authorized bank account. Usually, the
funds will arrive at your bank the next banking day
after we process your redemption.
You may also use Strong DirectSM, Strong Funds'
automated telephone response system. Call
1-800-368-3863 for details.
- ----------------------------------------------------------------------------
AUTOMATICALLY You can set up automatic withdrawals from your
account at regular intervals. To establish the
Systematic Withdrawal Plan, request a form by calling
1-800-368-3863.
- ----------------------------------------------------------------------------
BROKER-DEALER You may also redeem shares through broker-dealers or
others who may charge a commission or other
transaction fee.
</TABLE>
----------------------
PROSPECTUS PAGE II-7
<PAGE> 40
WHAT YOU SHOULD KNOW ABOUT SELLING SHARES
- - If you have recently purchased shares, please be aware that your redemption
request may not be honored until the purchase check has cleared your bank,
which generally occurs within ten calendar days.
- - The right of redemption may be suspended during any period in which (i)
trading on the Exchange is restricted, as determined by the SEC, or the
Exchange is closed for other than weekends and holidays; (ii) the SEC has
permitted such suspension by order; or (iii) an emergency as determined by the
SEC exists, making disposal of portfolio securities or valuation of net assets
of a Fund not reasonably practicable.
- - If you are selling shares you hold in certificate form, you must submit the
certificates with your redemption request. Each registered owner must endorse
the certificates and all signatures must be guaranteed.
- - Further documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact.
WHAT YOU SHOULD KNOW ABOUT TELEPHONE REDEMPTIONS
- - The Funds reserve the right to refuse a telephone redemption if they believe
it advisable to do so.
- - Once you place your telephone redemption request, it cannot be canceled or
modified.
- - Investors will bear the risk of loss from fraudulent or unauthorized
instructions received over the telephone provided that the Fund reasonably
believes that such instructions are genuine. The Funds and their transfer
agent employ reasonable procedures to confirm that instructions communicated
by telephone are genuine. The Funds may incur liability if they do not follow
these procedures.
- - Because of increased telephone volume, you may experience difficulty in
implementing a telephone redemption during periods of dramatic economic or
market changes.
SHAREHOLDER SERVICES
INFORMATION SERVICES
24-HOUR ASSISTANCE. Strong Funds has registered representatives available to
help you 24 hours a day, 7 days a week. Call 1-414-359-1400 or toll-free
1-800-368-3863. You may also write to Strong Funds at the address on the cover
of this Prospectus.
STRONG DIRECTSM AUTOMATED TELEPHONE SYSTEM. Also available 24 hours a day,
the Strong DirectSM automated response system enables you to use a
----------------------
PROSPECTUS PAGE II-8
<PAGE> 41
touch-tone phone to hear fund quotes and returns on any Strong Fund. You may
also confirm account balances, hear records of recent transactions and dividend
activity, and perform purchases, exchanges or redemptions among your existing
Strong accounts. Your account information is protected by a personal code that
you establish. For more information on this service, call 1-800-368-3863.
STATEMENTS AND REPORTS. At a minimum, each Fund will confirm all transactions
for your account on a quarterly basis. We recommend that you file each quarterly
statement - and, especially, each calendar year-end statement - with your other
important financial papers, since you may need to refer to them at a later date
for tax purposes. Should you need additional copies of previous statements, you
may order confirmation statements for the current and preceding year at no
charge. Statements for earlier years are available for $10 each. Call
1-800-368-3863 to order past statements.
Each year, you will also receive a statement confirming the tax status of any
distributions paid to you, as well as a semiannual report and an annual report
containing audited financial statements.
To reduce the volume of mail you receive, only one copy of certain materials,
such as prospectuses and shareholder reports, is mailed to your household. Call
1-800-368-3863 if you wish to receive additional copies, free of charge.
More complete information regarding each Fund's investment policies and
services is contained in its SAI, which you may request by calling or writing
Strong Funds at the phone number and address on the cover of this Prospectus.
CHANGING YOUR ACCOUNT INFORMATION. So that you continue receiving your Strong
correspondence, including any dividend checks and statements, please notify us
in writing as soon as possible if your address changes. You may use the
Additional Investment Form at the bottom of your confirmation statement, or
simply write us a letter of instruction that contains the following information:
1. a written request to change the address,
2. the account number(s) for which the address is to be changed,
3. the new address, and
4. the signatures of all owners of the accounts.
Please send your request to the address on the cover of this Prospectus.
Changes to your accounts' registrations - such as adding or removing a joint
owner, changing an owner's name, or changing the type of your account - must
also be submitted in writing. Please call 1-800-368-3863 for instructions. For
your protection, some requests may require a signature guarantee.
----------------------
PROSPECTUS PAGE II-9
<PAGE> 42
TRANSACTION SERVICES
FREE EXCHANGE PRIVILEGE. You may exchange shares between identically
registered Strong Funds accounts, either in writing or by telephone. By
establishing the telephone exchange services, you authorize the Fund and its
agents to act upon your instruction by telephone to redeem or exchange shares
from any account you specify. Please obtain and read the appropriate prospectus
before investing in any of the Strong Funds. Since an excessive number of
exchanges may be detrimental to the Funds, each Fund reserves the right to
discontinue the exchange privilege of any shareholder who makes more than five
exchanges in a year or three exchanges in a calendar quarter.
REGULAR INVESTMENT PLANS
Strong Funds' Automatic Investment Plan, Payroll Direct Deposit Plan, and
Automatic Exchange Plan, all discussed below, are methods of implementing DOLLAR
COST AVERAGING. Dollar cost averaging is an investment strategy that involves
investing a fixed amount of money at regular time intervals. By always investing
the same set amount, you will be purchasing more shares when the price is low
and fewer shares when the price is high. Ultimately, by using this principle in
conjunction with fluctuations in share price, your average cost per share may be
less than your average transaction price. A program of regular investment cannot
ensure a profit or protect against a loss during declining markets. Since such a
program involves continuous investment regardless of fluctuating share values,
you should consider your ability to continue the program through periods of both
low and high share-price levels.
AUTOMATIC INVESTMENT PLAN. The Automatic Investment Plan allows you to make
regular, systematic investments in a Fund from your bank checking or NOW
account. You may choose to make investments on any day of the month in amounts
of $50 or more. You can set up the Automatic Investment Plan with any financial
institution that is a member of the Automated Clearing House. Because each Fund
has the right to close an investor's account for failure to reach the minimum
initial investment, please consider your ability to continue this Plan until you
reach the minimum initial investment. Such closing may occur in periods of
declining share prices. To establish the Plan, complete the application at the
back of this Prospectus, or call 1-800-368-3863.
PAYROLL DIRECT DEPOSIT PLAN. Once you meet a Fund's minimum initial
investment requirement, you may purchase additional Fund shares through the
Payroll Direct Deposit Plan. Through this Plan, periodic investments (minimum
$50) are made automatically from your payroll check into your existing Fund
account. By enrolling in the Plan, you authorize your employer or its agents to
deposit a specified amount from your payroll check into the Fund's bank account.
In most cases, your Fund account will be credited the day after
-----------------------
PROSPECTUS PAGE II-10
<PAGE> 43
the amount is received by the Fund's bank. In order to participate in the Plan,
your employer must have direct deposit capabilities through Automated Clearing
House available to its employees. The Plan may be used for other direct
deposits, such as social security checks, military allotments, and annuity
payments.
To establish Direct Deposit for your account, call 1-800-368-3863 to obtain
an Authorization for Payroll Direct Deposit to a Strong Funds Account form. Once
the Plan is established, you may alter the amount of the deposit, alter the
frequency of the deposit, or terminate your participation in the program by
notifying your employer.
AUTOMATIC EXCHANGE PLAN. The Automatic Exchange Plan allows you to make
regular, systematic exchanges (minimum $50) from one Strong Funds account into
another Strong Funds account. By setting up the Plan, you authorize the Fund and
its agents to redeem a set dollar amount or number of shares from the first
account and purchase shares of a second Strong Fund. In addition, you authorize
a Fund and its agents to accept telephone instructions to change the dollar
amount and frequency of the exchange. An exchange transaction is a sale and
purchase of shares for federal income tax purposes and may result in a capital
gain or loss. To establish the Plan, request a form by calling 1-800-368-3863.
To participate in the Automatic Exchange Plan, you must have an initial
account balance of $2,500 in the first account and at least the minimum initial
investment in the second account. Exchanges may be made on any day or days of
your choice. If the amount remaining in the first account is less than the
exchange amount you requested, then the remaining amount will be exchanged. At
such time as the first account has a zero balance, your participation in the
Plan will be terminated. You may also terminate the Plan at any time by calling
or writing to the Fund. Once participation in the Plan has been terminated for
any reason, to reinstate the Plan you must do so in writing; simply investing
additional funds will not reinstate the Plan.
SYSTEMATIC WITHDRAWAL PLAN. You can set up automatic withdrawals from your
account at regular intervals. To begin distributions, you must have an initial
balance of $5,000 in your account and withdraw at least $50 per payment. To
establish the Systematic Withdrawal Plan, request a form by calling
1-800-368-3863. Depending upon the size of the account and the withdrawals
requested (and fluctuations in net asset value of the shares redeemed),
redemptions for the purpose of satisfying such withdrawals may reduce or even
exhaust the account. If the amount remaining in the account is not sufficient to
meet a plan payment, the remaining amount will be redeemed and the Plan will be
terminated.
-----------------------
PROSPECTUS PAGE II-11
<PAGE> 44
SPECIAL SITUATIONS
POWER OF ATTORNEY. If you are investing as attorney-in-fact for another
person, please complete the account application in the name of such person and
sign the back of the application in the following form: "[applicant's name] by
[your name], attorney-in-fact." To avoid having to file an affidavit prior to
each transaction, please complete the Power of Attorney form available from
Strong Funds at 1-800-368-3863. However, if you would like to use your own power
of attorney form, please call the same number for instructions.
CORPORATIONS AND TRUSTS. If you are investing for a corporation, please
include with your account application a certified copy of your corporate
resolution indicating which officers are authorized to act on behalf of the
corporation. As an alternative, you may complete a Certification of Authorized
Individuals form, which can be obtained from the Funds. Until a valid corporate
resolution or Certification of Authorized Individuals is received by the Fund,
services such as telephone and wire redemption will not be established.
If you are investing as a trustee, please include the date of the trust. All
trustees must sign the application. If they do not, services such as telephone
and wire redemption will not be established. All trustees must sign redemption
requests unless proper documentation to the contrary is provided to the Fund.
Failure to provide these documents, or signatures as required, when you invest
may result in delays in processing redemption requests.
SIGNATURE GUARANTEES. A signature guarantee is designed to protect you and
the Funds against fraudulent transactions by unauthorized persons. In the
following instances, the Funds will require a signature guarantee for all
authorized owners of an account:
- - when you add the telephone redemption option to your existing account;
- - if you transfer the ownership of your account to another individual or
organization;
- - when you submit a written redemption request for more than $25,000;
- - when you request to redeem or redeposit shares that have been issued in
certificate form;
- - if you open an account and later decide that you want certificates;
- - when you request that redemption proceeds be sent to a different name or
address than is registered on your account;
- - if you add/change your name or add/remove an owner on your account; and
- - if you add/change the beneficiary on your transfer on death account.
A signature guarantee may be obtained from any eligible guarantor
institution, as defined by the SEC. These institutions include banks, savings
associations, credit unions, brokerage firms, and others. PLEASE NOTE THAT A
NOTARY PUBLIC STAMP OR SEAL IS NOT ACCEPTABLE.
-----------------------
PROSPECTUS PAGE II-12
<PAGE> 45
APPENDIX A
RATINGS OF DEBT OBLIGATIONS:
<TABLE>
<CAPTION>
Moody's Standard & Fitch
Investors Poor's Ratings Investors
Service, Inc. Group Service, Inc. Definition
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LONG-TERM Aaa AAA AAA Highest quality
Aa AA AA High quality
A A A Upper medium grade
Baa BBB BBB Medium grade
Ba BB BB Low grade
B B B Speculative
Caa, Ca, C CCC, CC, C CCC, CC, C Submarginal
D D DDD, DD, D Probably in default
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Moody's S&P Fitch
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM MIG1/VMIG1 Best quality SP-+ Very strong quality F-1+ Exceptionally strong
quality
-------------------------------------------------------------------------------------------
MIG2/VMIG2 High quality SP-1 Strong quality F-1 Very strong quality
-------------------------------------------------------------------------------------------
MIG3/VMIG3 Favorable SP-2 Satisfactory grade F-2 Good credit quality
quality
-------------------------------------------------------------------------------------------
MIG4/VMIG4 Adequate F-3 Fair credit quality
quality
-------------------------------------------------------------------------------------------
SG Speculative SP-3 Speculative grade F-S Weak credit quality
grade
- ---------------------------------------------------------------------------------------------------------
COMMERCIAL P-1 Superior quality A-1+ Extremely strong F-1+ Exceptionally strong
PAPER quality quality
-------------------------------------------------------------------------------------------
A-1 Strong quality F-1 Very strong quality
-------------------------------------------------------------------------------------------
P-2 Strong quality A-2 Satisfactory quality F-2 Good credit quality
-------------------------------------------------------------------------------------------
P-3 Acceptable quality A-3 Adequate quality F-3 Fair credit quality
-------------------------------------------------------------------------------------------
B Speculative quality F-S Weak credit quality
-------------------------------------------------------------------------------------------
Not Prime C Doubtful quality D Default
- ---------------------------------------------------------------------------------------------------------
</TABLE>
----------------------
PROSPECTUS PAGE A-1
<PAGE> 46
APPENDIX B
WEIGHTED AVERAGE RATINGS OF DEBT OBLIGATIONS(1)
<TABLE>
<CAPTION>
Average Percentage of Assets Held During Percentage of Assets Held on December
1994(2) 31, 1994
- ---------------------------------------- ----------------------------------------
Asset Allocation Asset Allocation
Fund Fund
-------------------- --------------------
Equivalent Equivalent
S&P Moody's Rated Unrated(4) S&P Moody's Rated Unrated(4)
<S> <C> <C> <C> <C> <C> <C> <C>
AAA Aaa(5) 26.8 % - AAA Aaa(5) 27.7 % -
AA Aa 3.0 - AA Aa 2.0 -
A A 5.1 - A A 10.0 -
BBB Baa 17.9 - BBB Baa 16.1 -
BB Ba 0.2 - BB Ba - -
B B - - B B - -
CCC Caa - - CCC Caa - -
CC Ca - - CC Ca - -
C C - - C C - -
Totals 53.0 % 0% Totals 55.8 % 0%
</TABLE>
WEIGHTED AVERAGE RATINGS OF CORPORATE COMMERCIAL PAPER
<TABLE>
<CAPTION>
Average Percentage of Assets Held Percentage of Assets Held on December 31,
During 1994(2) 1993
- ------------------------------------------- -------------------------------------------
Asset Asset
S&P Moody's Rated Allocation S&P Moody's Rated Allocation
<S> <C> <C> <C> <C> <C> <C> <C>
A1 P1(6) 7.4 A1 P1(6) 2.8
A2 P2(6) 3.7 A2 P2(6) 3.3
A3 P3 - A3 P3 -
Totals 11.1 Totals 6.1
</TABLE>
(1) A security rated differently by the rating services is included in the
category representing the higher of the ratings assigned to the security.
(2) Based on a weighted average of the securities held at the end of each
month. Investment-grade debt obligations are those rated in one of the
four highest categories by an NRSRO and investment-grade commercial paper
rated in one of the top three categories by such organizations. See
"Implementation of Policies and Risks - Debt Obligations" in this
Prospectus for a discussion of the risks associated with
non-investment-grade debt obligations and Appendix A and the SAI for a
description of credit ratings. This Appendix does not contain information
on the Total Return and American Utilities Funds since these Funds do not
invest more than 5% of their assets in non-investment-grade debt
obligations.
(3) On December 28, 1994, the Asset Allocation Fund was authorized by the
Fund's Board of Directors to invest up to, but not including, 35% of
its total assets in non-investment-grade debt obligations. Previously, the
Fund could not invest in non-investment-grade debt obligations.
(4) This category represents the comparable quality of unrated securities, as
determined by the Advisor.
(5) Includes all U.S. government obligations.
(6) Includes commercial paper rated in an equivalent category by either D&P or
Fitch.
----------------------
PROSPECTUS PAGE B-1
<PAGE> 47
NOTES
<PAGE> 48
NOTES
<PAGE> 5
STATEMENT OF ADDITIONAL INFORMATION
STRONG ASSET ALLOCATION FUND, INC.
P.O. Box 2936
Milwaukee, Wisconsin 53201
Telephone: 1-414-359-1400
Toll-Free: 1-800-368-3863
This Statement of Additional Information is not a Prospectus and should be
read in conjunction with the Prospectus of Strong Asset Allocation Fund, Inc.
(formerly known as the Strong Investment Fund, Inc.) (the "Fund"), dated May 1,
1995. Requests for copies of the Prospectus should be made by writing to the
Fund, P.O. Box 2936, Milwaukee, Wisconsin 53201, Attention: Corporate
Secretary; or by calling one of the numbers listed above. The financial
statements appearing in the Fund's Annual Report, which accompanies this
Statement of Additional Information, are incorporated herein by reference.
This Statement of Additional Information is dated May 1, 1995.
<PAGE> 6
STRONG ASSET ALLOCATION FUND, INC.
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
- ----------------- ----
<S> <C>
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
INVESTMENT POLICIES AND TECHNIQUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
High-Yield (High-Risk) Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Derivative Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Variable- or Floating-Rate Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Mortgage- and Asset-Backed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
When-Issued Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Foreign Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Sovereign Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Illiquid Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Debt Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Lending of Portfolio Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Small Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Mortgage Dollar Rolls and Reverse Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . . 20
Short Sales Against the Box . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Depositary Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Foreign Investment Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
DIRECTORS AND OFFICERS OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
INVESTMENT ADVISOR AND DISTRIBUTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
PORTFOLIO TRANSACTIONS AND BROKERAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ADDITIONAL SHAREHOLDER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
FUND ORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SHAREHOLDER MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
PORTFOLIO MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
LEGAL COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
</TABLE>
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information and the Prospectus dated May 1, 1995, and if given or made, such
information or representations may not be relied upon as having been authorized
by the Fund.
This Statement of Additional Information does not
constitute an offer to sell securities.
<PAGE> 7
INVESTMENT RESTRICTIONS
The investment objective of the Fund is to seek high total return
consistent with reasonable risk over the long term. The Fund's investment
objective and policies are described in detail in the Prospectus under the
caption "Investment Objectives and Policies." The following are the Fund's
fundamental investment limitations which cannot be changed without shareholder
approval.
The Fund:
1. May not with respect to 75% of its total assets, purchase the
securities of any issuer (except securities issued or guaranteed by
the U.S. government or its agencies or instrumentalities) if, as a
result, (i) more than 5% of the Fund's total assets would be invested
in the securities of that issuer, or (ii) the Fund would hold more
than 10% of the outstanding voting securities of that issuer.
2. May (i) borrow money from banks and (ii) make other investments or
engage in other transactions permissible under the Investment Company
Act of 1940 (the "1940 Act") which may involve a borrowing, provided
that the combination of (i) and (ii) shall not exceed 33 1/3% of the
value of the Fund's total assets (including the amount borrowed), less
the Fund's liabilities (other than borrowings), except that the Fund
may borrow up to an additional 5% of its total assets (not including
the amount borrowed) from a bank for temporary or emergency purposes
(but not for leverage or the purchase of investments). The Fund may
also borrow money from the other Strong Funds or other persons to the
extent permitted by applicable law.
3. May not issue senior securities, except as permitted under the 1940
Act.
4. May not act as an underwriter of another issuer's securities, except
to the extent that the Fund may be deemed to be an underwriter within
the meaning of the Securities Act of 1933 in connection with the
purchase and sale of portfolio securities.
5. May not purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments (but this shall
not prevent the Fund from purchasing or selling options, futures
contracts, or other derivative instruments, or from investing in
securities or other instruments backed by physical commodities).
6. May not make loans if, as a result, more than 33 1/3% of the Fund's
total assets would be lent to other persons, except through (i)
purchases of debt securities or other debt instruments, or (ii)
engaging in repurchase agreements.
7. May not purchase the securities of any issuer if, as a result, more
than 25% of the Fund's total assets would be invested in the
securities of issuers, the principal business activities of which are
in the same industry.
8. May not purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not
prohibit the Fund from purchasing or selling securities or other
instruments backed by real estate or of issuers engaged in real estate
activities).
9. May, notwithstanding any other fundamental investment policy or
restriction, invest all of its assets in the securities of a single
open-end management investment company with substantially the same
fundamental investment objective, policies, and restrictions as the
Fund.
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<PAGE> 8
The following are the Fund's non-fundamental operating policies which
may be changed by the Fund's Board of Directors without shareholder approval.
The Fund may not:
1. Sell securities short, unless the Fund owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short,
or unless it covers such short sale as required by the current rules
and positions of the Securities and Exchange Commission or its staff,
and provided that transactions in options, futures contracts, options
on futures contracts, or other derivative instruments are not deemed
to constitute selling securities short.
2. Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions;
and provided that margin deposits in connection with futures
contracts, options on futures contracts, or other derivative
instruments shall not constitute purchasing securities on margin.
3. Invest in illiquid securities if, as a result of such investment, more
than 15% of its net assets would be invested in illiquid securities,
or such other amounts as may be permitted under the 1940 Act.
4. Purchase securities of other investment companies except in compliance
with the 1940 Act and applicable state law.
5. Invest all of its assets in the securities of a single open-end
management investment company with substantially the same fundamental
investment objective, restrictions and policies as the Fund.
6. Purchase the securities of any issuer (other than securities issued or
guaranteed by domestic or foreign governments or political
subdivisions thereof) if, as a result, more than 5% of its total
assets would be invested in the securities of issuers that, including
predecessor or unconditional guarantors, have a record of less than
three years of continuous operation. This policy does not apply to
securities of pooled investment vehicles or mortgage or asset-backed
securities.
7. Invest in direct interests in oil, gas, or other mineral exploration
programs or leases; however, the Fund may invest in the securities of
issuers that engage in these activities.
8. Engage in futures or options on futures transactions which are
impermissible pursuant to Rule 4.5 under the Commodity Exchange Act
and, in accordance with Rule 4.5, will use futures or options on
futures transactions solely for bona fide hedging transactions (within
the meaning of the Commodity Exchange Act), provided, however, that
the Fund may, in addition to bona fide hedging transactions, use
futures and options on futures transactions if the aggregate initial
margin and premiums required to establish such positions, less the
amount by which any such options positions are in the money (within
the meaning of the Commodity Exchange Act), do not exceed 5% of the
Fund's net assets.
In addition, (i) the aggregate value of securities underlying call
options on securities written by the Fund or obligations underlying
put options on securities written by the Fund determined as of the
date the options are written will not exceed 50% of the Fund's net
assets; (ii) the aggregate premiums paid on all options purchased by
the Fund and which are being held will not exceed 20% of the Fund's
net assets; (iii) the Fund will not purchase put or call options,
other than hedging positions, if, as a result thereof, more than 5% of
its total assets would be so invested; and (iv) the aggregate margin
deposits required on all futures and options on futures transactions
being held will not exceed 5% of the Fund's total assets.
9. Pledge, mortgage or hypothecate any assets owned by the Fund except as
may be necessary in connection with permissible borrowings or
investments and then such pledging, mortgaging, or hypothecating may
not exceed 33 1/3% of the Fund's total assets at the time of the
borrowing or investment.
10. Purchase or retain the securities of any issuer if any officer or
director of the Fund or its investment advisor beneficially owns more
than 1/2 of 1% of the securities of such issuer and such officers and
directors together own beneficially more than 5% of the securities of
such issuer.
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<PAGE> 9
11. Purchase warrants, valued at the lower of cost or market value, in
excess of 5% of the Fund's net assets. Included in that amount, but
not to exceed 2% of the Fund's net assets, may be warrants that are
not listed on any stock exchange. Warrants acquired by the Fund in
units or attached to securities are not subject to these restrictions.
12. Borrow money except (i) from banks or (ii) through reverse repurchase
agreements or mortgage dollar rolls, and will not purchase securities
when bank borrowings exceed 5% of its total assets.
13. Make any loans other than loans of portfolio securities, except
through (i) purchases of debt securities or other debt instruments, or
(ii) engaging in repurchase agreements.
Except for the fundamental investment limitations listed above and the
Fund's investment objective, the other investment policies described in the
Prospectus and this Statement of Additional Information are not fundamental and
may be changed with approval of the Fund's Board of Directors.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's
investment objective, policies and techniques that are described in detail in
the Prospectus under the captions "Investment Objectives and Policies" and
"Implementation of Policies and Risks."
HIGH-YIELD (HIGH-RISK) SECURITIES
IN GENERAL. The Fund has the authority to invest up to, but not
including, 35% of its assets in non-investment grade debt obligations.
Non-investment grade debt obligations (hereinafter referred to as
"lower-quality securities") include (i) bonds rated as low as C by Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Group ("S&P"),
or Fitch Investors Service, Inc. ("Fitch") or CCC by Duff & Phelps, Inc.
("D&P"); (ii) commercial paper rated as low as C by S&P, Not Prime by Moody's,
or Fitch 4 by Fitch; and (iii) unrated debt obligations of comparable quality.
Lower-quality securities, while generally offering higher yields than
investment-grade securities with similar maturities, involve greater risks,
including the possibility of default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. The special risk considerations in connection with such
investments are discussed below. Refer to the Appendix of this Statement of
Additional Information for a discussion of securities ratings.
EFFECT OF INTEREST RATES AND ECONOMIC CHANGES. The lower-quality
securities market is relatively new, and its growth paralleled a long economic
expansion. As a result, it is not clear how this market may withstand a
prolonged recession or economic downturn. Such a prolonged economic downturn
could severely disrupt the market for and adversely affect the value of such
securities.
All interest-bearing securities typically experience appreciation when
interest rates decline and depreciation when interest rates rise. The market
values of lower-quality securities tend to reflect individual corporate
developments to a greater extent than do higher rated securities, which react
primarily to fluctuations in the general level of interest rates.
Lower-quality securities also tend to be more sensitive to economic conditions
than are higher rated securities. As a result, they generally involve more
credit risks than securities in the higher rated categories. During an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of lower-quality securities may experience financial stress
and may not have sufficient revenues to meet their payment obligations. The
issuer's ability to service its debt obligations may also be adversely affected
by specific corporate developments, the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing.
The risk of loss due to default by an issuer of lower-quality securities is
significantly greater than issuers of higher rated securities because such
securities are generally unsecured and are often subordinated to other
creditors. Further, if the issuer of a lower-quality security defaulted, the
Fund might incur additional expenses to seek recovery. Periods of economic
uncertainty and changes would also generally result in increased volatility in
the market prices of lower-quality securities and thus in the Fund's net asset
value.
As previously stated, the value of such a security will decrease in a
rising interest rate market and accordingly, so will the Fund's net asset
value. If the Fund experiences unexpected net redemptions in such a market, it
may be forced to liquidate a
5
<PAGE> 10
portion of its portfolio securities without regard to their investment merits.
Due to the limited liquidity of lower-quality securities (discussed below) the
Fund may be forced to liquidate these securities at a substantial discount. Any
such liquidation would reduce the Fund's asset base over which expenses could
be allocated and could result in a reduced rate of return for the Fund.
PAYMENT EXPECTATIONS. Lower-quality securities typically contain
redemption, call, or prepayment provisions which permit the issuer of such
securities containing such provisions to, at their discretion, redeem the
securities. During periods of falling interest rates, issuers of lower-quality
securities are likely to redeem or prepay the securities and refinance them
with debt securities with a lower interest rate. To the extent an issuer is
able to refinance the securities, or otherwise redeem them, the Fund may have
to replace the securities with a lower yielding security, which would result in
a lower return for the Fund.
CREDIT RATINGS. Credit ratings issued by credit-rating agencies
evaluate the safety of principal and interest payments of rated securities.
They do not, however, evaluate the market value risk of lower rated securities
and, therefore, may not fully reflect the true risks of an investment. In
addition, credit-rating agencies may or may not make timely changes in a rating
to reflect changes in the economy or in the condition of the issuer that affect
the market value of the security. Consequently, credit ratings are used only
as a preliminary indicator of investment quality. Investments in lower rated
obligations will be more dependent on the Advisor's credit analysis than would
be the case with investments in investment grade debt obligations. The Advisor
employs its own credit research and analysis, which includes a study of
existing debt, capital structure, ability to service debt and to pay dividends,
the issuer's sensitivity to economic conditions, its operating history, and the
current trend of earnings. The Advisor continually monitors the investments in
the Fund's portfolio and carefully evaluates whether to dispose of or to retain
lower rated securities whose credit ratings or credit quality may have changed.
LIQUIDITY AND VALUATION. The Fund may have difficulty disposing of
certain lower-quality securities because there may be a thin trading market for
such securities. Because not all dealers maintain markets in all lower-quality
securities, there is no established retail secondary market for many of these
securities. The Fund anticipates that such securities could be sold only to a
limited number of dealers or institutional investors. To the extent a
secondary trading market does exist, it is generally not as liquid as the
secondary market for higher rated securities. The lack of a liquid secondary
market may have an adverse impact on the market price of the security. As a
result, the Fund's asset value and the Fund's ability to dispose of particular
securities, when necessary to meet the Fund's liquidity needs or in response to
a specific economic event, may be impacted. The lack of a liquid secondary
market for certain securities may also make it more difficult for the Fund to
obtain accurate market quotations for purposes of valuing the Fund's portfolio.
Market quotations are generally available on many lower-quality securities only
from a limited number of dealers and may not necessarily represent firm bids of
such dealers or prices for actual sales. During periods of thin trading, the
spread between bid and asked prices is likely to increase significantly. In
addition, adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of lower rated
securities, especially in a thinly traded market.
RECENT AND PROPOSED LEGISLATION. Recent legislation has been adopted, and
from time to time, proposals have been discussed, regarding new legislation
designed to limit the use of certain lower-quality securities by certain
issuers. An example of legislation is a recent law which requires federally
insured savings and loan associations to divest their investments in these
securities over time. It is not currently possible to determine the impact of
the recent legislation or the proposed legislation on the lower-quality
securities market. However, it is anticipated that if additional legislation
is enacted or proposed, it could have a material affect on the value of these
securities and the existence of a secondary trading market for the securities.
DERIVATIVE INSTRUMENTS
GENERAL DESCRIPTION. As discussed in the Prospectus, the Advisor may
use a variety of derivative instruments, including options, futures contracts
(sometimes referred to as "futures"), options on futures contracts, forward
currency contracts and swap agreements for any lawful purpose, such as to hedge
the Fund's portfolio, manage risk, or attempt to enhance returns.
The use of these instruments is subject to applicable regulations of
the Securities and Exchange Commission (the "SEC"), the several options and
futures exchanges upon which they may be traded, the Commodity Futures Trading
Commission
6
<PAGE> 11
(the "CFTC") and various state regulatory authorities. In addition, the Fund's
ability to use these instruments will be limited by tax considerations.
In addition to the products, strategies and risks described below and
in the Prospectus, the Advisor may discover additional derivative instruments
and other hedging techniques. These new opportunities may become available as
the Advisor develops new techniques or as regulatory authorities broaden the
range of permitted transactions. The Advisor may utilize these opportunities
to the extent that they are consistent with the Fund's investment objective and
permitted by the Fund's investment limitations and applicable regulatory
authorities.
SPECIAL RISKS OF THESE INSTRUMENTS. The use of derivative instruments
involves special considerations and risks as described below. Risks pertaining
to particular instruments are described in the sections that follow.
(1) Successful use of most of these instruments depends upon the
Advisor's ability to predict movements of the overall securities and currency
markets, which requires different skills than predicting changes in the prices
of individual securities. While the Advisor is experienced in the use of these
instruments, there can be no assurance that any particular strategy adopted
will succeed.
(2) There might be imperfect correlation, or even no correlation,
between price movements of an instrument and price movements of investments
being hedged. For example, if the value of an instrument used in a short hedge
(such as writing a call option, buying a put option, or selling a futures
contract) increased by less than the decline in value of the hedged investment,
the hedge would not be fully successful. Such a lack of correlation might
occur due to factors unrelated to the value of the investments being hedged,
such as speculative or other pressures on the markets in which these
instruments are traded. The effectiveness of hedges using instruments on
indices will depend on the degree of correlation between price movements in the
index and price movements in the investments being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies can
also reduce opportunity for gain by offsetting the positive effect of favorable
price movements in the hedged investments. For example, if the Fund entered
into a short hedge because the Advisor projected a decline in the price of a
security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the instrument. Moreover, if the price of the
instrument declined by more than the increase in the price of the security, the
Fund could suffer a loss.
(4) As described below, the Fund might be required to maintain assets
as "cover," maintain segregated accounts, or make margin payments when it takes
positions in these instruments involving obligations to third parties (i.e.,
instruments other than purchased options). If the Fund were unable to close
out its positions in such instruments, it might be required to continue to
maintain such assets or accounts or make such payments until the position
expired or matured. The requirements might impair the Fund's ability to sell a
portfolio security or make an investment at a time when it would otherwise be
favorable to do so, or require that the Fund sell a portfolio security at a
disadvantageous time. The Fund's ability to close out a position in an
instrument prior to expiration or maturity depends on the existence of a liquid
secondary market or, in the absence of such a market, the ability and
willingness of the other party to the transaction ("counter party") to enter
into a transaction closing out the position. Therefore, there is no assurance
that any hedging position can be closed out at a time and price that is
favorable to the Fund.
For a discussion of the federal income tax treatment of the Fund's
derivative instruments, see "Taxes -- Derivative Instruments" below.
GENERAL LIMITATIONS ON CERTAIN DERIVATIVE TRANSACTIONS. The Fund has
filed a notice of eligibility for exclusion from the definition of the term
"commodity pool operator" with the CFTC and the National Futures Association,
which regulate trading in the futures markets. Pursuant to Rule 4.5 of the
regulations under the Commodity Exchange Act (the "CEA"), the notice of
eligibility includes representations that the Fund will use futures contracts
and related options solely for bona fide hedging purposes within the meaning of
CFTC regulations, provided that the Fund may hold other positions in futures
contracts, and related options that do not qualify as a bona fide hedging
position if the aggregate initial margin deposits and premiums required to
establish these positions, less the amount by which any such options positions
are "in the money," do not exceed 5% of the Fund's net assets. Adoption of
these guidelines does not limit the percentage of the Fund's assets at risk to
5%.
7
<PAGE> 12
In addition, (i) the aggregate value of securities underlying call
options on securities written by the Fund or obligations underlying put options
on securities written by the Fund determined as of the date the options are
written will not exceed 50% of the Fund's net assets; (ii) the aggregate
premiums paid on all options purchased by the Fund and which are being held
will not exceed 20% of the Fund's net assets; (iii) the Fund will not purchase
put or call options, other than hedging positions, if, as a result thereof,
more than 5% of its total assets would be so invested; and (iv) the aggregate
margin deposits required on all futures and options on futures transactions
being held will not exceed 5% of the Fund's total assets.
The foregoing limitations are not fundamental policies of the Fund and
may be changed by the Fund's Board of Directors without shareholder approval as
regulatory agencies permit.
Transactions using options (other than purchased options), forward
currency contracts, and swaps expose the Fund to counter-party risk. To the
extent required by SEC guidelines, the Fund will not enter into any such
transactions unless it owns either (1) an offsetting ("covered") position in
securities, currencies, or other options, futures, or forward currency
contracts or (2) cash and liquid high grade debt obligations with a value
sufficient at all times to cover its potential obligations to the extent not
covered as provided in (1) above. The Fund will also segregate such assets
with respect to futures contracts and its net obligations under swap
agreements. See "Swap Agreements" below. Assets used as cover or held in a
segregated account cannot be sold while the position in the corresponding
option, futures contract, or forward currency contract is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion
of the Fund's assets to cover or segregate accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
OPTIONS. The Fund may purchase and write put and call options on
securities, on indices and on foreign currencies and enter into closing
transactions with respect to such options to terminate an existing position.
The purchase of call options serves as a long hedge, and the purchase of put
options serves as a short hedge. Writing put or call options can enable the
Fund to enhance income by reason of the premiums paid by the purchaser of such
options. Writing call options serves as a limited short hedge because declines
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option. However, if the security appreciates
to a price higher than the exercise price of the call option, it can be
expected that the option will be exercised and the Fund will be obligated to
sell the security at less than its market value or will be obligated to
purchase the security at a price greater than that at which the security must
be sold under the option. All or a portion of any assets used as cover for OTC
options written by the Fund would be considered illiquid to the extent
described under "Investment Policies and Techniques--Illiquid Securities."
Writing put options serves as a limited long hedge because increases in the
value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security depreciates to a
price lower than the exercise price of the put option, it can be expected that
the put option will be exercised and the Fund will be obligated to purchase the
security at more than its market value.
The value of an option position will reflect, among other things, the
historical price volatility of the underlying investment, the current market
value of the underlying investment, the time remaining until expiration, the
relationship of the exercise price to the market price of the underlying
investment, and general market conditions. Options used by the Fund may
include European-style options. This means that the option is only exercisable
at its expiration. This is in contrast to American-style options which are
exercisable at any time prior to the expiration date of the option. Options
that expire unexercised have no value.
The Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, the Fund may
terminate its obligation under a call or put option that it had written by
purchasing an identical call or put option; this is known as a closing purchase
transaction. Conversely, the Fund may terminate a position in a put or call
option it had purchased by writing an identical put or call option; this is
known as a closing sale transaction. Closing transactions permit the Fund to
realize the profit or limit the loss on an option position prior to its
exercise or expiration.
The Fund may purchase or write both exchange-traded and OTC options.
Exchange-traded options are issued by a clearing organization affiliated with
the exchange on which the option is listed that, in effect, guarantees
completion of every exchange-traded option transaction. OTC options are
contracts between the Fund and the other party to the transaction ("counter
party") (usually a securities dealer or a bank) with no clearing organization
guarantee. Thus, when the Fund purchases or writes an OTC option, it relies on
the counter party to make or take delivery of the underlying investment upon
exercise of the option.
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<PAGE> 13
Failure by the counter party to do so would result in the loss of any premium
paid by the Fund as well as the loss of any expected benefit of the
transaction.
The Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. The Fund
intends to purchase or write only those exchange-traded options for which there
appears to be a liquid secondary market. However, there can be no assurance
that such a market will exist at any, particular time. Closing transactions
can be made for OTC options only by negotiating directly with the counter
party, or by a transaction in the secondary market if any such market exists.
Although the Fund will enter into OTC options only with counter parties that
are expected to be capable of entering into closing transactions with the Fund,
there is no assurance that the Fund will in fact be able to close out an OTC
option at a favorable price prior to expiration. In the event of insolvency of
the counter party, the Fund might be unable to close out an OTC option position
at any time prior to its expiration.
If the Fund were unable to effect a closing transaction for an option
it had purchased, it would have to exercise the option to realize any profit.
The inability to enter into a closing purchase transaction for a covered call
option written by the Fund could cause material losses because the Fund would
be unable to sell the investment used as cover for the written option until the
option expires or is exercised.
The Fund may purchase and write put and call options on indices in much
the same manner as the options discussed above, except the index options may
serve as a hedge against overall fluctuations in the securities markets in
general.
The writing and purchasing of options is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. Imperfect correlation between
the options and securities markets may detract from the effectiveness of
attempted hedging.
SPREAD TRANSACTIONS. The Fund may purchase covered spread options from
securities dealers. Such covered spread options are not presently
exchange-listed or exchange-traded. The purchase of a spread option gives the
Fund the right to put, or sell, a security that it owns at a fixed dollar
spread or fixed yield spread in relationship to another security that the Fund
does not own, but which is used as a benchmark. The risk to the Fund in
purchasing covered spread options is the cost of the premium paid for the
spread option and any transaction costs. In addition, there is no assurance
that closing transactions will be available. The purchase of spread options
will be used to protect the Fund against adverse changes in prevailing credit
quality spreads, i.e., the yield spread between high quality and lower quality
securities. Such protection is only provided during the life of the spread
option.
FUTURES CONTRACTS. The Fund may enter into futures contracts,
including interest rate, index, and currency futures. The Fund may also
purchase put and call options, and write covered put and call options, on
futures in which it is allowed to invest. The purchase of futures or call
options thereon can serve as a long hedge, and the sale of futures or the
purchase of put options thereon can serve as a short hedge. Writing covered
call options on futures contracts can serve as a limited short hedge, and
writing covered put options on futures contracts can serve as a limited long
hedge, using a strategy similar to that used for writing covered options in
securities. The Fund's hedging may include purchases of futures as an offset
against the effect of expected increases in currency exchange rates and
securities prices and sales of futures as an offset against the effect of
expected declines in currency exchange rates and securities prices. The Fund's
futures transactions may be entered into for any lawful purpose such as hedging
purposes, risk management, or to enhance returns. The Fund may also write put
options on futures contracts while at the same time purchasing call options on
the same futures contracts in order to create synthetically a long futures
contract position. Such options would have the same strike prices and
expiration dates. The Fund will engage in this strategy only when the Advisor
believes it is more advantageous to the Fund than is purchasing the futures
contract.
To the extent required by regulatory authorities, the Fund only enters
into futures contracts that are traded on national futures exchanges and are
standardized as to maturity date and underlying financial instrument. Futures
exchanges and trading are regulated under the CEA by the CFTC. Although
techniques other than sales and purchases of futures contracts could be used to
reduce the Fund's exposure to market, currency, or interest rate fluctuations,
the Fund may be able to hedge its exposure more effectively and perhaps at a
lower cost through using futures contracts.
9
<PAGE> 14
A futures contract is an agreement pursuant to which the parties agree
to take or make delivery of an amount of cash equal to the difference between
the value of the index at the close of the last trading day of the contract and
the price at which the index futures contract was originally written. An
interest rate futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument (e.g., debt security) or currency for a specified price at a
designated date, time, and place. A foreign currency contract is a bilateral
agreement pursuant to which one party agrees to make and the other party agrees
to accept delivery of a specified type of currency at a specified future time
and at a specified price. Transaction costs are incurred when a futures
contract is bought or sold and margin deposits must be maintained. A futures
contract may be satisfied by delivery or purchase, as the case may be, of the
instrument, the currency or by payment of the change in the cash value of the
index. More commonly, futures contracts are closed out prior to delivery by
entering into an offsetting transaction in a matching futures contract.
Although the value of an index might be a function of the value of certain
specified securities, no physical delivery of those securities is made. If the
offsetting purchase price is less than the original sale price, the Fund
realizes a gain; if it is more, the Fund realizes a loss. Conversely, if the
offsetting sale price is more than the original purchase price, the Fund
realizes a gain; if it is less, the Fund realizes a loss. The transaction
costs must also be included in these calculations. There can be no assurance,
however, that the Fund will be able to enter into an offsetting transaction
with respect to a particular futures contract at a particular time. If the
Fund is not able to enter into an offsetting transaction, the Fund will
continue to be required to maintain the margin deposits on the futures
contract.
No price is paid by the Fund upon entering into a futures contract.
Instead, at the inception of a futures contract, the Fund is required to
deposit in a segregated account with its custodian, in the name of the futures
broker through whom the transaction was effected, "initial margin" consisting
of cash, U.S. government securities or other liquid, high grade debt
obligations, in an amount generally equal to 10% or less of the contract value.
Margin must also be deposited when writing a call or put option on a futures
contract, in accordance with applicable exchange rules. Unlike margin in
securities transactions, initial margin on futures contracts does not represent
a borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin payment, and initial margin
requirements might be increased generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the Fund purchases
or sells a futures contract or writes a call or put option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous. Purchasers and sellers of futures positions
and options on futures can enter into offsetting closing transactions by
selling or purchasing, respectively, an instrument identical to the instrument
held or written. Positions in futures and options on futures may be closed
only on an exchange or board of trade that provides a secondary market. The
Fund intends to enter into futures transactions only on exchanges or boards of
trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time.
Under certain circumstances, futures exchanges may establish daily
limits on the amount that the price of a future or option on a futures contract
can vary from the previous day's settlement price; once that limit is reached,
no trades may be made that day at a price beyond the limit. Daily price limits
do not limit potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If the Fund were unable to liquidate a futures or option on a futures
contract position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In
addition, except in the case of purchased options, the Fund would continue to
be required to make daily variation margin payments and might be required to
maintain the position being hedged by the future or option or to maintain cash
or securities in a segregated account.
Certain characteristics of the futures market might increase the risk
that movements in the prices of futures contracts or options on futures
contracts might not correlate perfectly with movements in the prices of the
investments being hedged. For example, all participants in the futures and
options on futures contracts markets are subject to daily variation margin
calls and might be compelled to liquidate futures or options on futures
contracts positions whose prices are moving unfavorably to avoid
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being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures markets are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, "program trading" and
other investment strategies might result in temporary price distortions.
SWAP AGREEMENTS. The Fund may enter into interest rate, securities
index and currency exchange rate swap agreements for purposes of attempting to
obtain or preserve a particular desired return or spread at a lower cost to the
Fund than if the Fund had invested directly in an instrument that yielded that
desired return or spread. The Fund also may enter into swaps in order to
protect against an increase in the price of, or the currency exchange rate
applicable to, securities that the Fund anticipates purchasing at a later date.
Swap agreements are two-party contracts entered into primarily by
institutional investors for periods ranging from a few weeks to several years.
In a standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular
predetermined investments or instruments. The gross returns to be exchanged or
"swapped" between the parties are calculated with respect to a "notional
amount," i.e., the return on or increase in value of a particular dollar amount
invested at a particular interest rate, in a particular foreign currency, or in
a "basket" of securities representing a particular index. Swap agreements may
include interest rate caps, under which, in return for a premium, one party
agrees to make payments to the other to the extent that interest rates exceed a
specified rate, or "cap," interest rate floors, under which, in return for a
premium, one party agrees to make payments to the other to the extent that
interest rates fall below a specified level, or "floor"; and interest rate
collars, under which a party sells a cap and purchases a floor, or vice versa,
in an attempt to protect itself against interest rate movements exceeding given
minimum or maximum levels.
The "notional amount" of the swap agreement is only the agreed upon
basis for calculating the obligations that the parties to a swap agreement have
agreed to exchange. Under most swap agreements entered into by the Fund, the
obligations of the parties would be exchanged on a "net basis." Consequently,
the Fund's obligations (or rights) under a swap agreement will generally be
equal only to the net amount to be paid or received under the agreement based
on the relative values of the positions held by each party to the agreement
(the "net amount"). The Fund's obligations under a swap agreement will be
accrued daily (offset against amounts owed to the Fund) and any accrued but
unpaid net amounts owed to a swap counter party will be covered by the
maintenance of a segregated account consisting of cash, or liquid high grade
debt obligations.
Whether the Fund's use of swap agreements will be successful in
furthering its investment objective will depend on the Advisor's ability to
predict correctly whether certain types of investments are likely to produce
greater returns than other investments. Swap agreements may be considered to
be illiquid. Moreover, the Fund bears the risk of loss of the amount expected
to be received under a swap agreement in the event of the default or bankruptcy
of a swap agreement counter party. Certain restrictions imposed on the Fund by
the Internal Revenue Code may limit the Fund's ability to use swap agreements.
The swaps market is largely unregulated.
The Fund will enter into swap agreements only with banks and recognized
securities dealers believed by the Advisor to present minimal credit risks in
accordance with guidelines established by the Fund's Board of Directors. If
there is a default by the other party to such a transaction, the Fund will have
to rely on its contractual remedies (which may be limited by bankruptcy,
insolvency or similar laws) pursuant to the agreements related to the
transaction.
FOREIGN CURRENCY-RELATED DERIVATIVE STRATEGIES-SPECIAL CONSIDERATIONS.
The Fund may also use options and futures on foreign currencies, as described
above, and forward currency contracts, as described below, to hedge against
movements in the values of the foreign currencies in which the Fund's
securities are denominated. The Fund may utilize foreign currency-related
derivative instruments for any lawful purpose, such as for bona fide hedging or
to seek to enhance returns through exposure to a particular foreign currency.
Such currency hedges can protect against price movements in a security the Fund
owns or intends to acquire that are attributable to changes in the value of the
currency in which it is denominated. Such hedges do not, however, protect
against price movements in the securities that are attributable to other
causes.
The Fund might seek to hedge against changes in the value of a
particular currency when no hedging instruments on that currency are available
or such hedging instruments are more expensive than certain other hedging
instruments. In such cases, the Fund may hedge against price movements in that
currency by entering into transactions using hedging instruments on
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<PAGE> 16
another foreign currency or a basket of currencies, the values of which the
Advisor believes will have a high degree of positive correlation to the value
of the currency being hedged. The risk that movements in the price of the
hedging instrument will not correlate perfectly with movements in the price of
the currency being hedged is magnified when this strategy is used.
The value of derivative instruments on foreign currencies depends on
the value of the underlying currency relative to the U.S. dollar. Because
foreign currency transactions occurring in the interbank market might involve
substantially larger amounts than those involved in the use of such derivative
instruments, the Fund could be disadvantaged by having to deal in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available through
dealers or other market sources be firm or revised on a timely basis.
Quotation information generally is representative of very large transactions in
the interbank market and thus might not reflect odd-lot transactions where
rates might be less favorable. The interbank market in foreign currencies is a
global, round-the-clock market. To the extent the U.S. options or futures
markets are closed while the markets for the underlying currencies remain open,
significant price and rate movements might take place in the underlying markets
that cannot be reflected in the markets for the derivative instruments until
they reopen.
Settlement of derivative transactions involving foreign currencies
might be required to take place within the country issuing the underlying
currency. Thus, the Fund might be required to accept or make delivery of the
underlying foreign currency in accordance with any U.S. or foreign regulations
regarding the maintenance of foreign banking arrangements by U.S. residents and
might be required to pay any fees, taxes and charges associated with such
delivery assessed in the issuing country.
Permissible foreign currency options will include options traded
primarily in the OTC market. Although options on foreign currencies are traded
primarily in the OTC market, the Fund will normally purchase OTC options on
foreign currency only when the Advisor believes a liquid secondary market will
exist for a particular option at any specific time.
FORWARD CURRENCY CONTRACTS. A forward currency contract involves an
obligation to purchase or sell a specific currency at a specified future date,
which may be any fixed number of days from the contract date agreed upon by the
parties, at a price set at the time the contract is entered into.
The Fund may enter into forward currency contracts to purchase or sell
foreign currencies for a fixed amount of U.S. dollars or another foreign
currency for any lawful purpose. Such transactions may serve as long hedges --
for example, the Fund may purchase a forward currency contract to lock in the
U.S. dollar price of a security denominated in a foreign currency that the Fund
intends to acquire. Forward currency contracts may also serve as short hedges
- -- for example, the Fund may sell a forward currency contract to lock in the
U.S. dollar equivalent of the proceeds from the anticipated sale of a security
denominated in a foreign currency.
As noted above, the Fund may seek to hedge against changes in the value
of a particular currency by using forward contracts on another foreign currency
or a basket of currencies, the value of which the Advisor believes will have a
positive correlation to the values of the currency being hedged. In addition,
the Fund may use forward currency contracts to shift exposure to foreign
currency fluctuations from one country to another. For example, if the Fund
owns securities denominated in a foreign currency and the Advisor believes that
currency will decline relative to another currency, it might enter into a
forward contract to sell an appropriate amount of the first foreign currency,
with payment to be made in the second foreign currency. Transactions that use
two foreign currencies are sometimes referred to as "cross hedges." Use of
different foreign currency magnifies the risk that movements in the price of
the instrument will not correlate or will correlate unfavorably with the
foreign currency being hedged.
The cost to the Fund of engaging in forward currency contracts varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because forward currency contracts
are usually entered into on a principal basis, no fees or commissions are
involved. When the Fund enters into a forward currency contract, it relies on
the counter party to make or take delivery of the underlying currency at the
maturity of the contract. Failure by the counter party to do so would result
in the loss of any expected benefit of the transaction.
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<PAGE> 17
As is the case with futures contracts, purchasers and sellers of
forward currency contracts can enter into offsetting closing transactions,
similar to closing transactions on futures, by selling or purchasing,
respectively, an instrument identical to the instrument purchased or sold.
Secondary markets generally do not exist for forward currency contracts, with
the result that closing transactions generally can be made for forward currency
contracts only by negotiating directly with the counter party. Thus, there can
be no assurance that the Fund will in fact be able to close out a forward
currency contract at a favorable price prior to maturity. In addition, in the
event of insolvency of the counter party, the Fund might be unable to close out
a forward currency contract at any time prior to maturity. In either event,
the Fund would continue to be subject to market risk with respect to the
position, and would continue to be required to maintain a position in
securities denominated in the foreign currency or to maintain cash or
securities in a segregated account.
The precise matching of forward currency contract amounts and the value
of the securities involved generally will not be possible because the value of
such securities, measured in the foreign currency, will change after the
foreign currency contract has been established. Thus, the Fund might need to
purchase or sell foreign currencies in the spot (cash) market to the extent
such foreign currencies are not covered by forward contracts. The projection
of short-term currency market movements is extremely difficult, and the
successful execution of a short-term hedging strategy is highly uncertain.
VARIABLE- OR FLOATING-RATE SECURITIES
The Fund may invest in securities which offer a variable- or
floating-rate of interest. Variable-rate securities provide for automatic
establishment of a new interest rate at fixed intervals (e.g., daily, monthly,
semi-annually, etc.). Floating-rate securities provide for automatic
adjustment of the interest rate whenever some specified interest rate index
changes. The interest rate on variable- or floating-rate securities is
ordinarily determined by reference to or is a percentage of a bank's prime
rate, the 90-day U.S. Treasury bill rate, the rate of return on commercial
paper, bank certificates of deposit, an index of short-term interest rates, or
some other objective measure.
Variable- or floating-rate securities frequently include a demand
feature entitling the holder to sell the securities to the issuer at par. In
many cases, the demand feature can be exercised at any time on 7 days' notice;
in other cases, the demand feature is exercisable at any time on 30 days'
notice or on similar notice at intervals of not more than one year. Some
securities, which do not have variable or floating interest rates, may be
accompanied by puts producing similar results and price characteristics. When
considering the maturity of any instrument which may be sold or put to the
issuer or a third party, the Fund may consider that instrument's maturity to be
shorter than its stated maturity.
Variable-rate demand notes include master demand notes, which are
obligations that permit the Fund to invest fluctuating amounts that may change
daily without penalty, pursuant to direct arrangements between the Fund, as
lender, and the borrower. The interest rates on these notes fluctuate from
time to time. The issuer of such obligations normally has a corresponding
right, after a given period, to prepay in its discretion the outstanding
principal amount of the obligations plus accrued interest upon a specified
number of days' notice to the holders of such obligations. The interest rate
on a floating-rate demand obligation is based on a known lending rate, such as
a bank's prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable-rate demand obligation is adjusted
automatically at specified intervals. Frequently, such obligations are secured
by letters of credit or other credit support arrangements provided by banks.
Because these obligations are direct-lending arrangements between the lender
and borrower, it is not contemplated that such instruments will generally be
traded. There generally is not an established secondary market for these
obligations, although they are redeemable at face value. Accordingly, where
these obligations are not secured by letters of credit or other credit support
arrangements, the Fund's right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. Such obligations frequently
are not rated by credit rating agencies and, if not so rated, the Fund may
invest in them only if the Fund's Advisor determines that, at the time of
investment, the obligations are of comparable quality to the other obligations
in which the Fund may invest. The Advisor, on behalf of the Fund, will
consider on an ongoing basis the creditworthiness of the issuers of the
floating- and variable-rate demand obligations in the Fund's portfolio.
The Fund will not invest more than 15% of its net assets in variable-
and floating-rate demand obligations that are not readily marketable (a
variable- or floating-rate demand obligation that may be disposed of on not
more than seven days notice will be deemed readily marketable and will not be
subject to this limitation). (See "Illiquid Securities" and "Investment
Restrictions.") In addition, each variable- or floating-rate obligation must
meet the credit quality requirements applicable to all the Fund's
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investments at the time of purchase. When determining whether such an
obligation meets the Fund's credit quality requirements, the Fund may look to
the credit quality of the financial guarantor providing a letter of credit or
other credit support arrangement.
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MORTGAGE- AND ASSET-BACKED SECURITIES
Mortgage-backed securities represent direct or indirect participations
in, or are secured by and payable from, mortgage loans secured by real
property, and include single- and multi-class pass-through securities and
collateralized mortgage obligations. Such securities may be issued or
guaranteed by U.S. government agencies or instrumentalities, such as the
Government National Mortgage Association and the Federal National Mortgage
Association, or by private issuers, generally originators and investors in
mortgage loans, including savings associations, mortgage bankers, commercial
banks, investment bankers, and special purpose entities (collectively, "private
lenders"). Mortgage-backed securities issued by private lenders may be
supported by pools of mortgage loans or other mortgage-backed securities that
are guaranteed, directly or indirectly, by the U.S. government or one of its
agencies or instrumentalities, or they may be issued without any governmental
guarantee of the underlying mortgage assets but with some form of
non-governmental credit enhancement.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. However, the underlying assets are not first lien
mortgage loans or interests therein, but include assets such as motor vehicle
installment sales contracts, other installment loan contracts, home equity
loans, leases of various types of property, and receivables from credit card or
other revolving credit arrangements. Payments or distributions of principal
and interest on asset-backed securities may be supported by non-governmental
credit enhancements similar to those utilized in connection with
mortgage-backed securities.
The yield characteristics of mortgage- and asset-backed securities
differ from those of traditional debt obligations. Among the principal
differences are that interest and principal payments are made more frequently
on mortgage-and asset-backed securities, usually monthly, and that principal
may be prepaid at any time because the underlying mortgage loans or other
assets generally may be prepaid at any time. As a result, if the Fund
purchases these securities at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing the yield to
maturity. Conversely, if the Fund purchases these securities at a discount, a
prepayment rate that is faster than expected will increase yield to maturity,
while a prepayment rate that is slower than expected will reduce yield to
maturity. Amounts available for reinvestment by the Fund are likely to be
greater during a period of declining interest rates and, as a result, are
likely to be reinvested at lower interest rates than during a period of rising
interest rates. Accelerated prepayments on securities purchased by the Fund at
a premium also impose a risk of loss of principal because the premium may not
have been fully amortized at the time the principal is prepaid in full. The
market for privately issued mortgage- and asset-backed securities is smaller
and less liquid than the market for government-sponsored mortgage-backed
securities.
The Fund may invest in stripped mortgage- or asset-backed securities,
which receive differing proportions of the interest and principal payments from
the underlying assets. The market value of such securities generally is more
sensitive to changes in prepayment and interest rates than is the case with
traditional mortgage- and asset-backed securities, and in some cases such
market value may be extremely volatile. With respect to certain stripped
securities, such as interest only and principal only classes, a rate of
prepayment that is faster or slower than anticipated may result in the Fund
failing to recover all or a portion of its investment, even though the
securities are rated investment grade.
WHEN-ISSUED SECURITIES
The Fund may invest without limitation in when-issued and delayed
delivery securities (collectively "When-Issued Securities"). The price of such
securities, which may be expressed in yield terms, is fixed at the time the
commitment to purchase is made, but delivery and payment for the When-Issued
Securities take place at a later date. Normally, the settlement date occurs
within one month of the purchase. During the period between purchase and
settlement, no payment is made by the Fund to the issuer and no interest
accrues to the Fund. Forward commitments involve a risk of loss if the value of
the security to be purchased declines prior to the settlement date, which risk
is in addition to the risk of decline in value of the Fund's other assets.
While When-Issued Securities may be sold prior to the settlement date, the Fund
intends to purchase such securities with the purpose of actually acquiring them
unless a sale appears desirable for investment reasons. At the time the Fund
makes the commitment to purchase a security on a when-issued basis, it will
record the transaction and reflect the value of the security in determining its
net asset value. The Fund does not believe that its net asset value or income
will be adversely affected by its purchases of securities on a when-issued
basis.
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The Fund will maintain cash and marketable securities equal in value to
commitments for When-Issued Securities. Such segregated securities either will
mature or, if necessary, be sold on or before the settlement date. When the
time comes to pay for When-Issued Securities, the Fund will meet its obligation
from then-available cash flow, sale of the securities held in the separate
account, described above, sale of other securities or, although it would not
normally expect to do so, from the sale of the When-Issued Securities
themselves (which may have a market value greater or less than the respective
Fund's payment obligation).
FOREIGN SECURITIES
The Fund may invest without limitation in foreign securities. Many of
the foreign securities held by the Fund will not be registered with the SEC,
nor will the issuers thereof be subject to SEC reporting requirements.
Accordingly, there may be less publicly available information concerning
foreign issuers of securities held by the Fund than is available concerning
U.S. companies. Disclosure and regulatory standards in many respects are less
stringent in emerging market countries than in the U.S. and other major
markets. There also may be a lower level of monitoring and regulation of
emerging markets and the activities of investors in such markets, and
enforcement of existing regulations may be extremely limited. Foreign
companies, and in particular, companies in smaller and emerging capital markets
are not generally subject to uniform accounting, auditing and financial
reporting standards or to other regulatory requirements comparable to those
applicable to U.S. companies. The Fund's net investment income and capital
gains from its foreign investment activities may be subject to non-U.S.
withholding taxes.
The costs attributable to foreign investing that the Fund must bear
frequently are higher than those attributable to domestic investing; this is
particularly true with respect to emerging capital markets. For example, the
cost of maintaining custody of foreign securities exceeds custodian costs for
domestic securities, and transaction and settlement costs of foreign investing
also frequently are higher than those attributable to domestic investing.
Costs associated with the exchange of currencies also make foreign investing
more expensive than domestic investing. Investment income on certain foreign
securities in which the Fund may invest may be subject to foreign withholding
or other government taxes that could reduce the return of these securities.
Tax treaties between the United States and foreign countries, however, may
reduce or eliminate the amount of foreign tax to which the Fund would be
subject.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
failed to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is
earned thereon. The inability of the Fund to make intended security purchases
due to settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of a portfolio security due to settlement
problems could result either in losses to the Fund due to subsequent declines
in the value of such portfolio security or, if the Fund has entered into a
contract to sell the security, could result in possible liability to the
purchaser.
SOVEREIGN DEBT
Sovereign debt differs from debt obligations issued by private entities
in that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is therefore limited. Political conditions,
especially a sovereign entity's willingness to meet the terms of its debt
obligations, are of considerable significance. Also, there can be no assurance
that the holders of commercial bank loans to the same sovereign entity may not
contest payments to the holders of sovereign debt in the event of default under
commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's
policy toward principal international lenders and the political constraints to
which a sovereign debtor may be subject. A country whose exports are
concentrated in a few commodities could be vulnerable to a decline in the
international price of such commodities. Increased protectionism on the part
of a country's trading partners, or political changes in those countries, could
also adversely affect its exports. Such events could diminish a country's
trade account surplus, if any, or the credit standing of a particular local
government or agency. Another factor bearing on the ability of a country to
repay sovereign debt is the level of the country's international reserves.
Fluctuations in the level of these reserves can affect the amount of foreign
exchange readily available for external debt payments and, thus, could have a
bearing on the capacity of the country to make payments on its sovereign debt.
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To the extent that a country has a current account deficit (generally
when exports of merchandise and services are less than the country's imports of
merchandise and services plus net transfers (e.g., gifts of currency and goods)
to foreigners), it will need to depend on loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and inflows of foreign investment. The access of a country
to these forms of external funding may not be certain, and a withdrawal of
external funding could adversely affect the capacity of a government to make
payments on its obligations. In addition, the cost of servicing debt
obligations can be affected by a change in international interest rates since
the majority of these obligations carry interest rates that are adjusted
periodically based upon international rates.
With respect to sovereign debt of emerging market issuers, investors
should be aware that certain emerging market countries are among the largest
debtors to commercial banks and foreign governments. At times certain emerging
market countries have declared moratoria on the payment of principal and
interest on external debt.
Certain emerging market countries have experienced difficulty in
servicing their sovereign debt on a timely basis which led to defaults on
certain obligations and the restructuring of certain indebtedness.
Restructuring arrangements have included, among other things, reducing and
rescheduling interest and principal payments by negotiating new or amended
credit agreements or converting outstanding principal and unpaid interest to
Brady Bonds (discussed below), and obtaining new credit to finance interest
payments. Holders of sovereign debt, including the Fund, may be requested to
participate in the rescheduling of such debt and to extend further loans to
sovereign debtors. The interests of holders of sovereign debt could be
adversely affected in the course of restructuring arrangements or by certain
other factors referred to below. Furthermore, some of the participants in the
secondary market for sovereign debt may also be directly involved in
negotiating the terms of these arrangements and may therefore have access to
information not available to other market participants. Obligations arising
from past restructuring agreements may affect the economic performance and
political and social stability of certain issuers of sovereign debt. There is
no bankruptcy proceeding by which sovereign debt on which a sovereign has
defaulted may be collected in whole or in part.
Foreign investment in certain sovereign debt is restricted or
controlled to varying degrees. These restrictions or controls may at times
limit or preclude foreign investment in such sovereign debt and increase the
costs and expenses of the Fund. Certain countries in which the Fund will
invest require governmental approval prior to investments by foreign persons,
limit the amount of investment by foreign persons in a particular issuer, limit
the investment by foreign persons only to a specific class of securities of an
issuer that may have less advantageous rights than the classes available for
purchase by domiciliaries of the countries, or impose additional taxes on
foreign investors. Certain issuers may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in a
country's balance of payments, the country could impose temporary restrictions
on foreign capital remittances. The Fund could be adversely affected by delays
in, or a refusal to grant, any required governmental approval for repatriation
of capital, as well as by the application to the Fund of any restrictions on
investments. Investing in local markets may require the Fund to adopt special
procedures, seek local government approvals or take other actions, each of
which may involve additional costs to the Fund.
The sovereign debt in which the Fund may invest includes Brady Bonds,
which are securities issued under the framework of the Brady Plan, an
initiative announced by former U.S. Treasury Secretary Nicholas F. Brady in
1989 as a mechanism for debtor nations to restructure their outstanding
external commercial bank indebtedness. In restructuring its external debt
under the Brady Plan framework, a debtor nation negotiates with its existing
bank lenders as well as multilateral institutions such as the International
Monetary Fund ("IMF"). The Brady Plan framework, as it has developed,
contemplates the exchange of commercial bank debt for newly issued Brady Bonds.
Brady Bonds may also be issued in respect of new money being advanced by
existing lenders in connection with the debt restructuring. The World Bank and
the IMF support the restructuring by providing funds pursuant to loan
agreements or other arrangements which enable the debtor nation to
collateralize the new Brady Bonds or to repurchase outstanding bank debt at a
discount.
There can be no assurance that the circumstances regarding the issuance
of Brady Bonds by these countries will not change. Investors should recognize
that Brady Bonds have been issued only recently, and accordingly do not have a
long payment history. Agreements implemented under the Brady Plan to date are
designed to achieve debt and debt-service reduction through specific options
negotiated by a debtor nation with its creditors. As a result, the financial
packages offered by each country differ. The types of options have included
the exchange of outstanding commercial bank debt for bonds issued at 100% of
face value of such debt, which carry a below-market stated rate of interest
(generally known as par bonds), bonds issued at a discount from the face value
of such debt (generally known as discount bonds), bonds bearing an interest
rate which increases over time, and bonds
17
<PAGE> 22
issued in exchange for the advancement of new money by existing lenders.
Regardless of the stated face amount and stated interest rate of the various
types of Brady Bonds, the Fund will purchase Brady Bonds in secondary markets,
as described below, in which the price and yield to the investor reflect market
conditions at the time of purchase.
Certain Brady Bonds have been collateralized as to principal due at
maturity by U.S. Treasury zero coupon bonds with maturities equal to the final
maturity of such Brady Bonds. Collateral purchases are financed by the IMF,
the World Bank, and the debtor nations' reserves. In the event of a default
with respect to collateralized Brady Bonds as a result of which the payment
obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. In addition, interest payments on certain types of Brady Bonds
may be collateralized by cash or high grade securities in amounts that
typically represent between 12 and 18 months of interest accruals on these
instruments with the balance of the interest accruals being uncollateralized.
Brady Bonds are often viewed as having several valuation components: (1) the
collateralized repayment of principal, if any, at final maturity, (2) the
collateralized interest payments, if any, (3) the uncollateralized interest
payments, and (4) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In light of
the residual risk of Brady Bonds and, among other factors, the history of
defaults with respect to commercial bank loans by public and private entities
of countries issuing Brady Bonds, investments in Brady Bonds are to be viewed
as speculative. The Fund may purchase Brady Bonds with no or limited
collateralization, and will be relying for payment of interest and (except in
the case of principal collateralized Brady Bonds) principal primarily on the
willingness and ability of the foreign government to make payment in accordance
with the terms of the Brady Bonds. Brady Bonds issued to date are purchased
and sold in secondary markets through U.S. securities dealers and other
financial institutions and are generally maintained through European
transnational securities depositories.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements with certain banks or
non-bank dealers. In a repurchase agreement, the Fund buys a security at one
price, and at the time of sale, the seller agrees to repurchase the obligation
at a mutually agreed upon time and price (usually within seven days). The
repurchase agreement, thereby, determines the yield during the purchaser's
holding period, while the seller's obligation to repurchase is secured by the
value of the underlying security. If the value of such securities is less than
the repurchase price, plus any agreed-upon additional amount, the other party
to the agreement will be required to provide additional collateral so that at
all times the collateral is at least equal to the repurchase price, plus any
agreed-upon additional amount. The Advisor will monitor, on an ongoing basis,
the value of the underlying securities to ensure that the value always equals
or exceeds the repurchase price plus accrued interest. Repurchase agreements
could involve certain risks in the event of a default or insolvency of the
other party to the agreement, including possible delays or restrictions upon
the Fund's ability to dispose of the underlying securities. Although no
definitive creditworthiness criteria are used, the Advisor reviews the
creditworthiness of the banks and non-bank dealers with which the Fund enters
into repurchase agreements to evaluate those risks. The Fund may, under certain
circumstances, deem repurchase agreements collateralized by U.S. government
securities to be investments in U.S. government securities.
ILLIQUID SECURITIES
The Fund may invest in illiquid securities (i.e., securities that are
not readily marketable). However, the Fund will not acquire illiquid
securities if, as a result, they would comprise more than 15% of the value of
the Fund's net assets (or such other amounts as may be permitted under the 1940
Act). The Board of Directors or its delegate has the ultimate authority to
determine, to the extent permissible under the federal securities laws, which
securities are illiquid for purposes of this limitation. Certain securities
exempt from registration or issued in transactions exempt from registration
under the Securities Act of 1933, as amended (the "Securities Act"), including
securities that may be resold pursuant to Rule 144A under the Securities Act or
Section 4(2) commercial paper, may be considered liquid. The Board of
Directors has delegated to the Advisor the day-to-day determination of the
liquidity of a security, although it has retained oversight and ultimate
responsibility for such determinations. Although no definitive liquidity
criteria are used, the Fund's Board of Directors has directed the Advisor to
look to such factors as (i) the nature of the market for a security (including
the institutional private resale market), (ii) the terms of certain securities
or other instruments allowing for the disposition to a third party or the
issuer thereof (e.g., certain repurchase obligations and demand
18
<PAGE> 23
instruments), (iii) the availability of market quotations (e.g., for securities
quoted in the PORTAL system), and (iv) other permissible relevant factors.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act. Where registration is
required, the Fund may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a less favorable price than
prevailed when it decided to sell. Restricted securities will be priced at
fair value as determined in good faith by the Fund's Board of Directors. If
through the appreciation of restricted securities or the depreciation of
unrestricted securities, the Fund should be in a position where more than 15%
of the value of its net assets are invested in illiquid securities, including
restricted securities which are not readily marketable, the Fund will take such
steps as are deemed advisable, if any, to protect liquidity.
The Fund may sell OTC options and, in connection therewith, segregate
assets or cover its obligations with respect to OTC options written by the
Fund. The assets used as cover for OTC options written by the Fund will be
considered illiquid unless the OTC options are sold to qualified dealers who
agree that the Fund may repurchase any OTC option it writes at a maximum price
to be calculated by a formula set forth in the option agreement. The cover for
an OTC option written subject to this procedure would be considered illiquid
only to the extent that the maximum repurchase price under the formula exceeds
the intrinsic value of the option.
WARRANTS
The Fund may acquire warrants. Warrants are securities giving the
holder the right, but not the obligation, to buy the stock of an issuer at a
given price (generally higher than the value of the stock at the time of
issuance) during a specified period or perpetually. Warrants may be acquired
separately or in connection with the acquisition of securities. The Fund will
not purchase warrants, valued at the lower of cost or market value, in excess
of 5% of the Fund's net assets. Included in that amount, but not to exceed 2%
of the Fund's net assets, may be warrants that are not listed on any stock
exchange. Warrants acquired by the Fund in units or attached to securities are
not subject to these restrictions. Warrants do not carry with them the right
to dividends or voting rights with respect to the securities that they entitle
their holder to purchase, and they do not represent any rights in the assets of
the issuer. As a result, warrants may be considered more speculative than
certain other types of investments. In addition, the value of a warrant does
not necessarily change with the value of the underlying securities, and a
warrant ceases to have value if it is not exercised prior to its expiration
date.
DEBT OBLIGATIONS
The Fund may invest a portion of its assets in debt obligations,
including U.S. government securities, commercial paper, banker's acceptances,
certificates of deposit, and time deposits. Issuers of debt obligations have a
contractual obligation to pay interest at a specified rate on specified dates
and to repay principal on a specified maturity date. Certain debt obligations
(usually intermediate- and long-term bonds) have provisions that allow the
issuer to redeem or "call" a bond before its maturity. Issuers are most likely
to call such securities during periods of falling interest rates.
PRICE VOLATILITY. The market value of debt obligations is affected by
changes in prevailing interest rates. The market value of a debt obligation
generally reacts inversely to interest-rate changes, meaning, when prevailing
interest rates decline, an obligation's price usually rises, and when
prevailing interest rates rise, an obligation's price usually declines. A fund
portfolio consisting primarily of debt obligations will react similarly to
changes in interest rates.
MATURITY. In general, the longer the maturity of a debt obligation,
the higher its yield and the greater its sensitivity to changes in interest
rates. Conversely, the shorter the maturity, the lower the yield but the
greater the price stability. Commercial paper is generally considered the
shortest form of debt obligation. The term "bond" generally refers to
securities with maturities longer than two years. Bonds with maturities of
three years or less are considered short-term, bonds with maturities between
three and seven years are considered intermediate-term, and bonds with
maturities greater than seven years are considered long-term.
19
<PAGE> 24
CREDIT QUALITY. The values of debt obligations may also be affected by
changes in the credit rating or financial condition of their issuers.
Generally, the lower the quality rating of a security, the higher the degree of
risk as to the payment of interest and return of principal. To compensate
investors for taking on such increased risk, those issuers deemed to be less
creditworthy generally must offer their investors higher interest rates than do
issuers with better credit ratings.
In conducting its credit research and analysis, the Advisor considers
both qualitative and quantitative factors to evaluate the creditworthiness of
individual issuers. The Advisor also relies, in part, on credit ratings
compiled by a number of NRSROs. See the Appendix for additional information.
TEMPORARY DEFENSIVE POSITION. When the Advisor determines that market
conditions warrant a temporary defensive position, the Fund may invest without
limitation in cash and short-term fixed income securities, including U.S.
government securities, commercial paper, banker's acceptances, certificates of
deposit, and time deposits.
LENDING OF PORTFOLIO SECURITIES
The Fund is authorized to lend up to 33 1/3% of the total value of its
portfolio securities to broker-dealers or institutional investors that the
Advisor deems qualified, but only when the borrower maintains with the Fund's
custodian bank collateral either in cash or money market instruments in an
amount at least equal to the market value of the securities loaned, plus
accrued interest and dividends, determined on a daily basis and adjusted
accordingly. However, the Fund does not presently intend to engage in such
lending. In determining whether to lend securities to a particular
broker-dealer or institutional investor, the Advisor will consider, and during
the period of the loan will monitor, all relevant facts and circumstances,
including the creditworthiness of the borrower. The Fund will retain authority
to terminate any loans at any time. The Fund may pay reasonable administrative
and custodial fees in connection with a loan and may pay a negotiated portion
of the interest earned on the cash or money market instruments held as
collateral to the borrower or placing broker. The Fund will receive reasonable
interest on the loan or a flat fee from the borrower and amounts equivalent to
any dividends, interest or other distributions on the securities loaned. The
Fund will retain record ownership of loaned securities to exercise beneficial
rights, such as voting and subscription rights and rights to dividends,
interest or other distributions, when retaining such rights is considered to be
in the Fund's interest.
SMALL COMPANIES
The Fund may, from time to time, invest a substantial portion of its
assets in small companies. While smaller companies generally have the
potential for rapid growth, investments in smaller companies often involve
greater risks than investments in larger, more established companies because
smaller companies may lack the management experience, financial resources,
product diversification, and competitive strengths of larger companies. In
addition, in many instances the securities of smaller companies are traded only
over-the-counter or on a regional securities exchange, and the frequency and
volume of their trading is substantially less than is typical of larger
companies. Therefore, the securities of smaller companies may be subject to
greater and more abrupt price fluctuations. When making large sales, the Fund
may have to sell portfolio holdings at discounts from quoted prices or may have
to make a series of small sales over an extended period of time due to the
trading volume of smaller company securities. Investors should be aware that,
based on the foregoing factors, an investment in the Fund may be subject to
greater price fluctuations than an investment in a fund that invests primarily
in larger, more established companies. The Advisor's research efforts may also
play a greater role in selecting securities for the Fund than in a fund that
invests in larger, more established companies.
BORROWING
The Fund may borrow money from banks, limited by the Fund's fundamental
investment restriction to 33 1/3% of its total assets and may engage in
mortgage dollar roll transactions and reverse repurchase agreements which may
be considered a form of borrowing. (See "Mortgage Dollar Rolls and Reverse
Repurchase Agreements" below.) In addition, the Fund may borrow up to an
additional 5% of its total assets from banks for temporary or emergency
purposes. The Fund will not purchase securities when bank borrowings exceed 5%
of the Fund's total assets.
20
<PAGE> 25
MORTGAGE DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS
The Fund may engage in reverse repurchase agreements to facilitate
portfolio liquidity, a practice common in the mutual fund industry, or for
arbitrage transactions discussed below. In a reverse repurchase agreement, the
Fund would sell a security and enter into an agreement to repurchase the
security at a specified future date and price. The Fund generally retains the
right to interest and principal payments on the security. Since the Fund
receives cash upon entering into a reverse repurchase agreement, it may be
considered a borrowing. When required by guidelines of the SEC, the Fund will
set aside permissible liquid assets in a segregated account to secure its
obligation to repurchase the security.
The Fund may also enter into mortgage dollar rolls, in which the Fund
would sell mortgage-backed securities for delivery in the current month and
simultaneously contract to purchase substantially similar securities on a
specified future date. While the Fund would forego principal and interest paid
on the mortgage-backed securities during the roll period, the Fund would be
compensated by the difference between the current sales price and the lower
price for the future purchase as well as by any interest earned on the proceeds
of the initial sale. The Fund also could be compensated through the receipt of
fee income equivalent to a lower forward price. At the time that the Fund would
enter into a mortgage dollar roll, it would set aside permissible liquid assets
in a segregated account to secure its obligation for the forward commitment to
buy mortgage-backed securities. Mortgage dollar roll transactions may be
considered a borrowing by the Fund.
The mortgage dollar rolls and reverse repurchase agreements entered
into by the Fund may be used as arbitrage transactions in which the Fund will
maintain an offsetting position in investment-grade securities or repurchase
agreements that mature on or before the settlement date on the related mortgage
dollar roll or reverse repurchase agreement. Since the Fund will receive
interest on the securities or repurchase agreements in which it invests the
transaction proceeds, such transactions may involve leverage. However, since
such securities or repurchase agreements will be high quality and will mature
on or before the settlement date of the mortgage dollar roll or reverse
repurchase agreement, the Advisor believes that such arbitrage transactions do
not present the risks to the Fund that are associated with other types of
leverage.
SHORT SALES AGAINST THE BOX
The Fund may sell securities short against the box to hedge unrealized
gains on portfolio securities. Selling securities short against the box
involves selling a security that the Fund owns or has the right to acquire, for
delivery at a specified date in the future. If the Fund sells securities short
against the box, it may protect unrealized gains, but will lose the opportunity
to profit on such securities if the price rises.
DEPOSITARY RECEIPTS
As indicated in the Prospectus, the Fund may invest in foreign
securities by purchasing depositary receipts, including American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs") or other securities
convertible into securities of issuers based in foreign countries. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. Generally, ADRs, in registered
form, are denominated in U.S. dollars and are designed for use in the U.S.
securities markets, while EDRs, in bearer form, may be denominated in other
currencies and are designed for use in European securities markets. ADRs are
receipts typically issued by a U.S. bank or trust company evidencing ownership
of the underlying securities. EDRs are European receipts evidencing a similar
arrangement. For purposes of the Fund's investment policies, ADRs and EDRs are
deemed to have the same classification as the underlying securities they
represent. Thus, an ADR or EDR representing ownership of common stock will be
treated as common stock.
ADR facilities may be established as either "unsponsored" or
"sponsored." While ADRs issued under these two types of facilities are in some
respects similar, there are distinctions between them relating to the rights
and obligations of ADR holders and the practices of market participants. A
depositary may establish an unsponsored facility without participation by (or
even necessarily the acquiescence of) the issuer of the deposited securities,
although typically the depositary requests a letter of non-objection from such
issuer prior to the establishment of the facility. Holders of unsponsored ADRs
generally bear all the costs of such facilities. The depositary usually
charges fees upon the deposit and withdrawal of the deposited securities, the
conversion of dividends into U.S. dollars, the disposition of non-cash
distributions, and the performance of other services. The depositary of an
unsponsored facility frequently is under no obligation to distribute
shareholder communications received from the issuer of the deposited securities
or to pass through voting rights to ADR holders in respect of the deposited
securities. Sponsored ADR
21
<PAGE> 26
facilities are created in generally the same manner as unsponsored facilities,
except that the issuer of the deposited securities enters into a deposit
agreement with the depositary. The deposit agreement sets out the rights and
responsibilities of the issuer, the depositary and the ADR holders. With
sponsored facilities, the issuer of the deposited securities generally will
bear some of the costs relating to the facility (such as dividend payment fees
of the depositary), although ADR holders continue to bear certain other costs
(such as deposit and withdrawal fees). Under the terms of most sponsored
arrangements, depositories agree to distribute notices of shareholder meetings
and voting instructions, and to provide shareholder communications and other
information to the ADR holders at the request of the issuer of the deposited
securities.
FOREIGN INVESTMENT COMPANIES
Some of the countries in which the Fund invests may not permit direct
investment by outside investors. Investments in such countries may only be
permitted through foreign government-approved or -authorized investment
vehicles, which may include other investment companies. Investing through such
vehicles may involve frequent or layered fees or expenses and may also be
subject to limitation under the 1940 Act. Under the 1940 Act, the Fund may
invest up to 10% of its assets in shares of investment companies and up to 5%
of its assets in any one investment company as long as the investment does not
represent more than 3% of the voting stock of the acquired investment company.
DIRECTORS AND OFFICERS OF THE FUND
Directors and officers of the Fund, together with information as to
their principal business occupations during the last five years, and other
information are shown below. Each director who is deemed an "interested
person," as defined in the 1940 Act, is indicated by an asterisk. Each officer
and director holds the same position with the following registered investment
companies: Strong Advantage Fund, Inc.; Strong American Utilities Fund, Inc.;
Strong Asia Pacific Fund, Inc.; Strong Common Stock Fund, Inc.; Strong
Corporate Bond Fund, Inc.; Strong Discovery Fund, Inc.; Strong Discovery Fund
II, Inc.; Strong Government Securities Fund, Inc.; Strong Growth Fund, Inc.;
Strong High-Yield Municipal Bond Fund, Inc.; Strong Insured Municipal Bond
Fund, Inc.; Strong International Bond Fund, Inc.; Strong International Stock
Fund, Inc.; Strong Money Market Fund, Inc.; Strong Municipal Bond Fund, Inc.;
Strong Municipal Money Market Fund, Inc.; Strong Opportunity Fund, Inc.; Strong
Short-Term Bond Fund, Inc.; Strong Short-Term Global Bond Fund, Inc.; Strong
Short-Term Municipal Bond Fund, Inc.; Strong Special Fund II, Inc.; Strong
Total Return Fund, Inc.; and Strong U.S. Treasury Money Fund, Inc.
(collectively, the "Strong Funds").
*Richard S. Strong (DOB 5/12/42), Chairman of the Board and Director of
the Fund.
Prior to August 1985, Mr. Strong was Chief Executive Officer of the
Advisor, which he founded in 1974. Since August 1985, Mr. Strong has been a
Security Analyst and Portfolio Manager of the Advisor. In October 1991, Mr.
Strong also became the Chairman of the Advisor. Mr. Strong is a director of
the Advisor. Since October 1993, Mr. Strong has been Chairman and a director
of Strong Holdings, Inc., a Wisconsin corporation and subsidiary of the Advisor
("Holdings"), and the Fund's underwriter, Strong Funds Distributors, Inc., a
Wisconsin corporation and subsidiary of Holdings ("Distributor"). Since
January 1994, Mr. Strong has been Chairman and a director of Heritage Reserve
Development Corporation, a Wisconsin Corporation and subsidiary of Holdings;
and since February 1994, Mr. Strong has been a member of the Managing Boards of
Fussville Real Estate Holdings L.L.C., a Wisconsin Limited Liability Company
and subsidiary of the Advisor, and Fussville Development L.L.C., a Wisconsin
Limited Liability Company and subsidiary of the Advisor, and a certain of its
subsidiaries. Mr. Strong has served as a director of the Fund since its
inception in 1981 and as Chairman of the Board of the Fund since July 1986.
Mr. Strong has been in the investment management business since 1967.
Marvin E. Nevins (DOB 7/9/18), Director of the Fund.
Private Investor. From 1945 to 1980, Mr. Nevins was Chairman of
Wisconsin Centrifugal Inc., a foundry. From July 1983 to December 1986, he was
Chairman of General Casting Corp., Waukesha, Wisconsin, a foundry. Mr. Nevins
is a former Chairman of the Wisconsin Association of Manufacturers & Commerce.
He was also a regent of the Milwaukee School of Engineering and a member of the
Board of Trustees of the Medical College of Wisconsin. Mr. Nevins has served
as a director of the Fund since the Fund's inception in 1981.
22
<PAGE> 27
Willie D. Davis (DOB 7/24/34), Director of the Fund.
Mr. Davis has been director of Alliance Bank Since 1980, Sara Lee
Corporation (a food/consumer products company) since 1983, KMart Corporation (a
discount consumer products company) since 1985, YMCA Metropolitan - Los Angeles
since 1985, Dow Chemical Company since 1988, MGM Grand, Inc. (an
entertainment/hotel company) since 1990, WICOR, Inc. (a utility company) since
1990, Johnson Controls, Inc. (an industrial company) since 1992, L.A. Gear (a
footwear/sportswear company) since 1992, and Rally's Hamburger, Inc. since
1994. Mr. Davis has been a trustee of the University of Chicago since 1980,
Marquette University since 1988, and Occidental College since 1990. Since
1977, Mr. Davis has been President and Chief Executive Officer of All Pro
Broadcasting, Inc. Mr. Davis was a director of the Fireman's Fund (an
insurance company) from 1975 until 1990. Mr. Davis has served as a director of
the Fund since July 1994.
*John Dragisic (DOB 11/26/40), Vice Chairman of the Fund.
Mr. Dragisic has been Vice Chairman and a director of the Advisor and
director of Holdings and Distributor since July 1994. Mr. Dragisic served as
a director of the Fund from July 1991 until July 1994. Mr. Dragisic was the
President and Chief Executive Officer of Grunau Company, Inc. (a mechanical
contracting and engineering firm), Milwaukee, Wisconsin from 1987 until July
1994. From 1981 to 1987, he was an Executive Vice President with Grunau
Company, Inc. From 1969 until 1973, Mr. Dragisic worked for the Inter American
Development Bank. Mr. Dragisic received his Ph.D. in Economics in 1971 from
the University of Wisconsin-Madison, and his B.A. degree in Economics in 1962
from Lake Forest College. Mr. Dragisic has been Vice Chairman of the Fund
since July 1994.
Stanley Kritzik (DOB 1/9/30), Director of the Fund.
Mr. Kritzik has been a Partner of Metropolitan Associates
since and a Director of Aurora Health Care and Health Network Ventures,
Inc. since . He has served as a director of the Fund since April 1995.
William F. Vogt (DOB 7/19/47), Director of the Fund.
Mr. Vogt has been the President of Vogt Management Consulting, Inc.
since 1990. From 1982 until 1990, he served as an executive director of
University Physicians. Mr. Vogt was also a Fellow of the Medical Group
Management Association, American College of Medical Practice Executives. He
has served as a director of the Fund since April 1995.
Lawrence A. Totsky (DOB 5/6/59), C.P.A., Vice President of the Fund.
Mr. Totsky has been Senior Vice President of the Advisor since December
1994. Mr. Totsky acted as the Advisor's Manager of Shareholder Accounting and
Compliance from June 1987 to June 1991 when he was named Director of Mutual
Fund Administration. Mr. Totsky has been a Vice President of the Fund since May
1993.
Thomas P. Lemke (DOB 7/30/54), Vice President of the Fund.
Mr. Lemke has been Senior Vice President, Secretary, and General
Counsel of the Advisor since September 1994. For two years prior to joining
the Advisor, Mr. Lemke acted as Resident Counsel for Funds Management at J.P.
Morgan & Co., Inc. From February 1989 until April 1992, Mr. Lemke acted as
Associate General Counsel to Sanford C. Bernstein Co., Inc. For two years
prior to that, Mr. Lemke was Of Counsel at the Washington D.C. law firm of Tew
Jorden & Schulte, a successor of Finley, Kumble Wagner. From August 1979 until
December 1986, Mr. Lemke worked at the Securities and Exchange Commission, most
notably as the Chief Counsel to the Division of Investment Management (November
1984 - December 1986), and as Special Counsel to the Office of Insurance
Products, Division of Investment Management (April 1982 - October 1984). Mr.
Lemke has been a Vice President of the Fund since October 1994.
Ann E. Oglanian (DOB 12/7/61), Secretary of the Fund.
Ms. Oglanian has been an Associate Counsel of the Advisor since January
1992. Ms. Oglanian acted as Associate Counsel for the Chicago-based
investment management firm, Kemper Financial Services, Inc. from June 1988
until December 1991. Ms. Oglanian has been the Secretary of the Fund since May
1994.
23
<PAGE> 28
Ronald A. Neville (5/21/47), C.P.A., Treasurer of the Fund.
Mr. Neville has been the Senior Vice President and Chief Financial
Officer of the Advisor since January 1995. For fourteen years prior to that,
Mr. Neville worked at Twentieth Century Companies, Inc., most notably as Senior
Vice President and Chief Financial Officer (1988 until December 1994). Mr.
Neville received his M.B.A. in 1972 from the University of Missouri - Kansas
City and his B.A. degree in Business Administration and Economics in 1969 from
Drury College. Mr. Neville has been the Treasurer of the Fund since April
1995.
Except for Messrs. Nevins, Davis, Kritzik, and Vogt, the address of all
of the above persons is P.O. Box 2936, Milwaukee, Wisconsin 53201. Mr. Nevins'
address is 6075 Pelican Bay Boulevard, Naples, Florida 33962-8172. Mr. Davis'
address is 161 North La Brea, Inglewood, California 90301. Mr. Kritzik's
address is 1123 North Astor Street, P.O. Box 92547, Milwaukee, Wisconsin
53202-0547. Mr. Vogt's address is 3003 East Third Avenue, Denver, Colorado
80206.
As of March 31, 1995, the officers and directors of the Fund in the
aggregate beneficially owned less than 1% of Fund's then outstanding shares.
Directors and officers of the Fund who are officers, directors, employees, or
stockholders of the Advisor do not receive any remuneration from the Fund for
serving as directors or officers.
PRINCIPAL SHAREHOLDERS
As of March 31, 1995, the following persons owned of record or are
known by the Fund to own of record or beneficially, more than 5% of the Fund's
outstanding shares:
<TABLE>
<CAPTION>
NAME AND ADDRESS SHARES PERCENT OF CLASS
---------------- ------ ----------------
<S> <C> <C>
Charles Schwab & Co., Inc. 683,983 5.09%
101 Montgomery Street
San Francisco, California 94104
</TABLE>
INVESTMENT ADVISOR AND DISTRIBUTOR
The Advisor to the Fund is Strong Capital Management, Inc. Mr.
Richard S. Strong controls the Advisor. Mr. Strong is the Chairman and a
director of the Advisor, Mr. Dragisic is the Vice Chairman and a director of
the Advisor, Mr. Totsky is a Senior Vice President of the Advisor, Mr. Lemke is
a Senior Vice President, Secretary and General Counsel of the Advisor, Mr.
Neville is a Senior Vice President and Chief Financial Officer of the Advisor,
Ms. Oglanian, is an Associate Counsel of the Advisor, and Mr. Zoeller is the
Treasurer of the Advisor. A brief description of the Fund's investment
advisory agreement is set forth in the Prospectus under "About the Funds -
Management."
The Advisory Agreement, which is dated April 13, 1995 (the "Advisory
Agreement"), was last approved by shareholders at the annual meeting of
shareholders held on April 13, 1995. The Advisory Agreement is required to be
approved annually by the Board of Directors of the Fund or by vote of a
majority of the Fund's outstanding voting securities (as defined in the 1940
Act). In either case, each annual renewal must be approved by the vote of a
majority of the Fund's directors who are not parties to the Advisory Agreement
or interested persons of any such party, cast in person at a meeting called for
the purpose of voting on such approval. The Advisory Agreement is terminable,
without penalty, on 60 days' written notice by the Board of Directors of the
Fund, by vote of a majority of the Fund's outstanding voting securities, or by
the Advisor. In addition, the Advisory Agreement will terminate automatically
in the event of its assignment.
Under the terms of the Advisory Agreement, the Advisor manages the
Fund's investments subject to the supervision of the Fund's Board of Directors.
The Advisor is responsible for investment decisions and supplies investment
research and portfolio management. At its expense, the Advisor provides office
space and all necessary office facilities, equipment, and personnel for
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<PAGE> 29
servicing the investments of the Fund. The Advisor places all orders for the
purchase and sale of the Fund's portfolio securities at its expense.
Except for expenses assumed by the Advisor as set forth above or as
described below with respect to the distribution of the Fund's shares, the Fund
is responsible for all its other expenses, including, without limitation,
interest charges, taxes, brokerage commissions, and similar expenses; expenses
of issue, sale, repurchase, or redemption of shares; expenses of registering or
qualifying shares for sale; expenses for printing and distribution costs of
Prospectuses and quarterly financial statements mailed to existing
shareholders; and charges of custodians, transfer agent fees (including the
printing and mailing of reports and notices to shareholders), fees of
registrars, fees for auditing and legal services, fees for clerical services
related to recordkeeping and shareholder relations, the cost of stock
certificates, and fees for directors who are not "interested persons" of the
Advisor. The Fund, Advisor, and each of Salomon Brothers Inc. ("Salomon") and
PaineWebber, Incorporated ("PaineWebber") have entered into an agreement
pursuant to which Salomon or PaineWebber pays certain expenses incurred by the
Fund with proceeds from certain brokerage commissions received by Salomon or
PaineWebber. (See "Portfolio Transactions and Brokerage.")
As compensation for its services, the Fund pays to the Advisor a
monthly advisory fee at the annual rate of .85% of the first $35,000,000 of the
Fund's average daily net asset value and at the annual rate of .80% of the
Fund's average daily net asset value in excess of $35,000,000. (See
"Shareholder Manual - Determining Your Share Price" in the Prospectus.) From
time to time, the Advisor may voluntarily waive all or a portion of its
management fee for the Fund. In 1992, 1993, and 1994 the Fund paid the Advisor
$1,698,048, $1,843,753, and $2,077,850, respectively, in advisory fees.
The Advisory Agreement requires the Advisor to reimburse the Fund in
the event that the expenses and charges payable by the Fund in any fiscal year,
including the advisory fee but excluding taxes, interest, brokerage
commissions, and similar fees and to the extent permitted extraordinary
expenses, exceed that percentage of the average net asset value of the Fund for
such year. Such excess is determined by valuations made as of the close of each
business day of the year, which is the most restrictive percentage provided by
the state laws of the various states in which the Fund's common stock is
qualified for sale; or if the states in which the Fund's common stock is
qualified for sale impose no restrictions, then 2%. The most restrictive
percentage limitation currently applicable to the Fund is 2 1/2% of its average
net asset value up to $30,000,000, 2% on the next $70,000,000 of average net
asset value, and 1 1/2% of the average net asset value in excess of
$100,000,000. Reimbursement of expenses in excess of the applicable limitation
will be made on a monthly basis and will be paid to the Fund by reduction of
the Advisor's fee, subject to later adjustment, month by month, for the
remainder of the Fund's fiscal year. The Advisor may from time to time
voluntarily absorb expenses for the Fund in addition to the reimbursement of
expenses in excess of applicable limitations.
On July 12, 1994, the Securities and Exchange Commission (the SEC)
filed an administrative action (Order) against the Advisor, Mr. Strong, and
another employee of the Advisor in connection with conduct that occurred
between 1987 and early 1990. In re Strong/Corneliuson Capital Management, Inc.,
et al. Admin. Proc. File No. 3-8411. The proceeding was settled by consent
without admitting or denying the allegations in the Order. The Order alleged
that the Advisor and Mr. Strong aided and abetted violations of Section 17(a)
of the 1940 Act by effecting trades between mutual funds, and between mutual
funds and Harbour Investments Ltd. ("Harbour"), without complying with the
exemptive provisions of SEC Rule 17a-7 or otherwise obtaining an exemption. It
further alleged that the Advisor violated, and Mr. Strong aided and abetted
violations of, the disclosure provisions of the 1940 Act and the Investment
Advisers Act of 1940 by misrepresenting the Advisor's policy on personal
trading and by failing to disclose trading by Harbour, an entity in which
principals of the Advisor owned between 18 and 25 percent of the voting stock.
As part of the settlement, the respondents agreed to a censure and a cease and
desist order and the Advisor agreed to various undertakings, including adoption
of certain procedures and a limitation for six months on accepting certain
types of new advisory clients.
The staff of the U.S. Department of Labor (the "Staff") has contacted
the Advisor regarding alleged cross-trading of securities between 1987 and
early 1990 involving various customer accounts subject to the Employee
Retirement Security Act of 1974 ("ERISA") and managed by the Advisor. The
Advisor has informed the Staff of the basis for its position that the trades
complied with ERISA and that, in any event, any alleged noncompliance was not
the cause of any losses to the accounts. The Staff has stated that it
disagrees with the Advisor's positions, although to date it has not filed any
action against the Advisor. At this time, the Advisor is negotiating with the
Staff regarding a possible resolution of the matter, but it cannot presently
determine whether the matter will be settled or litigated or, if it is settled
or litigated, how it ultimately will be resolved. However, management
presently believes, based on current knowledge and the Advisor's insurance
coverage, that the ultimate resolution of this matter should not have a
material adverse effect on the Advisor's financial position.
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<PAGE> 30
Under a Distribution Agreement dated December 1, 1993 with the Fund
(the "Distribution Agreement"), Distributor acts as underwriter of the Fund's
shares. The Distribution Agreement provides that Distributor will use its best
efforts to distribute the Fund's shares. Since the Fund is a "no-load" fund,
no sales commissions are charged on the purchase of Fund shares. The
Distribution Agreement further provides that Distributor will bear the costs of
printing Prospectuses and shareholder reports which are used for selling
purposes, as well as advertising and other costs attributable to the
distribution of the Fund's shares. Distributor is an indirect subsidiary of
the Advisor and controlled by the Advisor and Richard S. Strong. Prior to
December 1, 1993, when the Fund charged a low sales load, the Advisor acted as
underwriter for the Fund. During 1992, the Advisor received compensation for
its services as underwriter of the Fund's shares of $118,390. On December 1,
1993, Distributor succeeded to the broker-dealer registration of the Advisor
and, in connection therewith, the Distribution Agreement was executed on
substantially identical terms as the former distribution agreement with the
Advisor as distributor. The Distribution Agreement is subject to the same
termination and renewal provisions as are described above with respect to the
Advisory Agreement.
From time to time, the Distributor may hold in-house sales incentive
programs for its associated persons under which these persons may receive
non-cash compensation awards in connection with the sale and distribution of
the Fund's shares. These awards may include items such as, but not limited to,
gifts, merchandise, gift certificates, and payment of travel expenses, meals
and lodging. As required by the National Association of Securities Dealers,
Inc. or NASD's proposed rule amendments in this area, any in-house sales
incentive program will be multi-product oriented, i.e., any incentive will be
based on an associated person's gross production of all securities within a
product type and will not be based on the sales of shares of any specifically
designated mutual fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisor is responsible for decisions to buy and sell securities
for the Fund and for the placement of its portfolio business and the
negotiation of the commissions to be paid on such transactions. It is the
policy of the Advisor to seek the best execution at the best security price
available with respect to each transaction, in light of the overall quality of
brokerage and research services provided to the Advisor or the Fund. In
over-the-counter transactions, orders are placed directly with a principal
market maker unless it is believed that a better price and execution can be
obtained by using a broker. The best price to the Fund means the best net
price without regard to the mix between purchase or sale price and commissions.
In selecting broker-dealers and in negotiating commissions, the Advisor
considers the firm's reliability, the quality of its execution services on a
continuing basis, and its financial condition. Brokerage will not be allocated
based on the sale of Fund shares.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment advisor, under certain circumstances, to cause an account
to pay a broker or dealer who supplies brokerage and research services a
commission for effecting a transaction in excess of the amount of commission
another broker or dealer would have charged for effecting the transaction.
Brokerage and research services include (a) furnishing advice as to the value
of securities, the advisability of investing, purchasing or selling securities,
and the availability of securities or purchasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement, and custody).
In carrying out the provisions of the Advisory Agreement, the Advisor
may cause the Fund to pay a broker which provides brokerage and research
services to the Advisor a commission for effecting a securities transaction in
excess of the amount another broker would have charged for effecting the
transaction. The Advisor is of the opinion that the continued receipt of
supplemental investment research services from broker-dealers is essential to
its provision of high-quality portfolio management services to the Fund. The
Advisory Agreement provides that such higher commissions will not be paid by
the Fund unless (a) the Advisor determines in good faith that the amount is
reasonable in relation to the services in terms of the particular transaction
or in terms of the Advisor's overall responsibilities with respect to the
accounts as to which it exercises investment discretion; (b) such payment is
made in compliance with the provisions of Section 28(e), other applicable state
and federal laws, and the Advisory Agreement; and (c) in the opinion of the
Advisor, the total commissions paid by the Fund will be reasonable in relation
to the benefits to the Fund over the long term. The investment advisory fee
paid by the Fund under the Advisory Agreement is not reduced as a result of the
Advisor's receipt of research services. During 1992, 1993, and 1994, the Fund
paid approximately $520,000, $630,000, and $626,000, respectively, in brokerage
commissions.
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<PAGE> 31
Generally, research services provided consist of portfolio pricing and
research reports dealing with macroeconomic trends and monetary and fiscal
policy, research reports on individual companies and industries, and
information dealing with market trends and technical analysis. Such brokers
may pay for all or a portion of computer hardware and software costs relating
to the pricing of securities. Where the Advisor itself receives both
administrative benefits and research and brokerage services from the services
provided by brokers, it makes a good faith allocation between the
administrative benefits and the research and brokerage services. The Advisor's
receipt of these administrative benefits arises from its ability, in certain
cases, to direct brokerage to certain firms in connection with its management
of client portfolios. In making good faith allocations between administrative
benefits and research and brokerage services, a conflict of interest may exist
by reason of the Advisor's allocation of the costs of such benefits and
services between those that primarily benefit the Advisor and those that
primarily benefit its clients, such as the Fund.
The Advisor places portfolio transactions for other advisory accounts,
including other mutual funds managed by the Advisor. Research services
furnished by firms through which the Fund effects its securities transactions
may be used by the Advisor in servicing all of its accounts; not all of such
services may be used by the Advisor in connection with the Fund. In the
opinion of the Advisor, it is not possible to separately measure the benefits
from research services to each of the accounts (including the Fund) managed by
the Advisor. Because the volume and nature of the trading activities of the
accounts are not uniform, the amount of commissions in excess of those charged
by another broker paid by each account for brokerage and research services will
vary. However, in the opinion of the Advisor, such costs to the Fund will not
be disproportionate to the benefits received by the Fund on a continuing basis.
The Advisor seeks to allocate portfolio transactions equitably
whenever concurrent decisions are made to purchase or sell securities by the
Fund and another advisory account. In some cases, this procedure could have an
adverse effect on the price or the amount of securities available to the Fund.
In making such allocations between the Fund and other advisory accounts, the
main factors considered by the Advisor are the respective investment
objectives, the relative size of portfolio holdings of the same or comparable
securities, the availability of cash for investment, the size of investment
commitments generally held, and the opinions of the persons responsible for
recommending the investment.
The Fund has entered into agreements with the Advisor and each of
Salomon and PaineWebber (collectively, the "Brokers"), in which the Brokers
have agreed to pay directly to vendors certain investment management and other
related expenses incurred and otherwise payable by the Fund ("Expense
Agreements"). In accordance with the Expense Agreements, the Advisor directs
the delivery to the Brokers of invoices determined by the Fund to be
appropriate for payment by the Brokers. The Brokers pay the invoices with the
proceeds of certain commissions received from the Fund. The Expense Agreements
provide that a percentage of commissions received from the Fund for completed
agency transactions in certain securities for the Fund, designated by the
Advisor as directed commissions subject to the Expense Agreements, shall be
used by the Brokers to pay the invoices. Investment management and other
related expenses include those payable by the Fund, as described under
"Investment Advisor and Distributor" in this Statement of Additional
Information.
CUSTODIAN
As custodian of the Fund's assets, Firstar Trust Company, P.O. Box
701, Milwaukee, Wisconsin 53201, has custody of all securities and cash of the
Fund, delivers and receives payment for securities sold, receives and pays for
securities purchased, collects income from investments, and performs other
duties, all as directed by officers of the Fund. The custodian is in no way
responsible for any of the investment policies or decisions of the Fund.
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<PAGE> 32
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
The Advisor acts as transfer agent and dividend-disbursing agent for
the Fund. The Advisor is compensated based on an annual fee per open account
of the Fund of $21.75 plus certain out-of-pocket expenses and a $4.20 charge
per account per annum on all closed accounts, payable monthly. For transfer
agent and dividend-disbursing agent services in 1992, 1993, and 1994, the Fund
paid the Advisor $515,216, $524,693, and $594,683, respectively, in per account
charges and $101,948, $64,072, and $158,509, respectively, for out-of-pocket
expenses. The Advisor also acts as investment advisor to the Fund. The fees
received and the services provided as transfer agent and dividend-disbursing
agent are in addition to the fees received and services provided under the
Advisory Agreement.
In addition to the foregoing services, the Advisor provides certain
printing and mailing services for the Fund, such as printing and mailing of
shareholder account statements, checks, and tax forms. During 1992, 1993, and
1994, the Fund paid the Advisor $11,600, $12,746, and $14,340, respectively,
for printing and mailing services.
From time to time, the Fund, directly or indirectly through
arrangements with the Advisor, may pay amounts to third parties that provide
transfer agent and other administrative services relating to the Fund to
persons who beneficially own interests in the Fund, such as participants in
401(k) plans. These services may include, among other things, sub-accounting
services, answering inquiries relating to the Fund, transmitting, on behalf of
the Fund, proxy statements, annual reports, updated Prospectuses, other
communications regarding the Fund, and related services as the Fund or
beneficial owners may reasonably request. In such cases, the Fund will not pay
fees at a rate that is greater than the rate the Fund is currently paying the
Advisor for providing these services to Fund shareholders.
TAXES
GENERAL
As indicated under "About the Funds -- Distributions and Taxes" in the
Prospectus, the Fund intends to continue to qualify annually for treatment as a
regulated investment company ("RIC") under the Internal Revenue Code of 1986,
as amended (the "Code"). This qualification does not involve government
supervision of the Fund's management practices or policies.
In order to qualify for treatment as a RIC under the Code, the Fund
must distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of net investment
income, net short-term capital gain, and net gains from certain foreign
currency transactions) ("Distribution Requirement") and must meet several
additional requirements. Among these requirements are the following: (1) the
Fund must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans, and gains from
the sale or other disposition of securities or foreign currencies, or other
income (including gains from options, futures, or forward contracts) derived
with respect to its business of investing in securities or those currencies
("Income Requirement"); (2) the Fund must derive less than 30% of its gross
income each taxable year from the sale or other disposition of securities, or
any of the following, that were held for less than three months -- options or
futures (other than those on foreign currencies), or foreign currencies (or
options, futures, or forward contracts thereon) that are not directly related
to the Fund's principal business of investing in securities (or options and
futures with respect to securities) ("30% Limitation"); (3) at the close of
each quarter of the Fund's taxable year, at least 50% of the value of its total
assets must be represented by cash and cash items, U.S. government securities,
securities of other RICs, and other securities, with these other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the Fund's total assets and that does not represent more than 10%
of the issuer's outstanding voting securities; and (4) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its total
assets may be invested in securities (other than U.S. government securities or
the securities of other RICs) of any one issuer.
If Fund shares are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital
loss to the extent of any capital gain distributions received on those shares.
The Fund will be subject to a nondeductible 4% excise tax ("Excise
Tax") to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year period ending on October 31 of that year, plus certain
other amounts.
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FOREIGN TRANSACTIONS
Interest and dividends received by the Fund may be subject to income,
withholding, or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes on capital gains in
respect of investments by foreign investors. If more than 50% of the value of
the Fund's total assets at the close of its taxable year consists of securities
of foreign corporations, it will be eligible to, and may, file an election with
the Internal Revenue Service that would enable its shareholders, in effect, to
receive the benefit of the foreign tax credit with respect to any foreign and
U.S. possessions income taxes paid by it. Pursuant to the election, the Fund
would treat those taxes as dividends paid to its shareholders and each
shareholder would be required to (1) include in gross income, and treat as paid
by him, his proportionate share of those taxes, (2) treat his share of those
taxes and of any dividend paid by the Fund that represents income from foreign
or U.S. possessions sources as his own income from those sources, and (3)
either deduct the taxes deemed paid by him in computing his taxable income or,
alternatively, use the foregoing information in calculating the foreign tax
credit against his federal income tax. The Fund will report to its
shareholders shortly after each taxable year their respective shares of its
income from sources within, and taxes paid to, foreign countries and U.S.
possessions if it makes this election.
The Fund maintains its accounts and calculates its income in U.S.
dollars. In general, gain or loss (1) from the disposition of foreign
currencies and forward currency contracts, (2) from the disposition of
foreign-currency-denominated debt securities that are attributable to
fluctuations in exchange rates between the date the securities are acquired and
their disposition date, and (3) attributable to fluctuations in exchange rates
between the time the Fund accrues interest or other receivables or expenses or
other liabilities denominated in a foreign currency and the time the Fund
actually collects those receivables or pays those liabilities, will be treated
as ordinary income or loss. A foreign-currency-denominated debt security
acquired by the Fund may bear interest at a high nominal rate that takes into
account expected decreases in the value of the principal amount of the security
due to anticipated currency devaluations; in that case, the Fund would be
required to include the interest in income as it accrues but generally would
realize a currency loss with respect to the principal only when the principal
was received (through disposition or upon maturity).
The Fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (1) at least 75% of its gross income is passive
or (2) an average of at least 50% of its assets produce, or are held for the
production of, passive income. Under certain circumstances, the Fund will be
subject to federal income tax on a portion of any "excess distribution"
received on the stock of a PFIC or of any gain on disposition of the stock
(collectively, "PFIC income"), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent that
income is distributed to its shareholders. If the Fund invests in a PFIC and
elects to treat the PFIC as a "qualified electing fund," then in lieu of the
foregoing tax and interest obligation, the Fund will be required to include in
income each year its pro rata share of the qualified electing fund's annual
ordinary earnings and net capital gain (the excess of net long-term capital
gain over net short-term capital loss) -- which probably would have to be
distributed to its shareholders to satisfy the Distribution Requirement and
avoid imposition of the Excise Tax -- even if those earnings and gain were not
received by the Fund. In most instances it will be very difficult, if not
impossible, to make this election because of certain requirements thereof.
The "Tax Simplification and Technical Corrections Bill of 1993,"
passed in May 1994 by the House of Representatives, would substantially modify
the taxation of U.S. shareholders of foreign corporations, including
eliminating the provisions described above dealing with PFICs and replacing
them (and other provisions) with a regulatory scheme involving entities called
"passive foreign corporations." Three similar bills were passed by Congress in
1991 and 1992 and were vetoed. It is unclear at this time whether, and in what
form, the proposed modifications may be enacted into law.
Pursuant to proposed regulations, open-end RICs such as the Fund would
be entitled to elect to "mark-to-market" their stock in certain PFICs.
"Marking-to-market," in this context, means recognizing as gain for each
taxable year the excess, as of the end of that year, of the fair market value
of each such PFIC's stock over the adjusted basis in that stock (including
mark-to-market gain for each prior year for which an election was in effect).
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<PAGE> 34
DERIVATIVE INSTRUMENTS
The use of derivatives strategies, such as purchasing and selling
(writing) options and futures and entering into forward currency contracts,
involves complex rules that will determine for income tax purposes the
character and timing of recognition of the gains and losses the Fund realizes
in connection therewith. Gains from the disposition of foreign currencies
(except certain gains therefrom that may be excluded by future regulations),
and income from transactions in options, futures, and forward currency
contracts derived by the Fund with respect to its business of investing in
securities or foreign currencies, will qualify as permissible income under the
Income Requirement. However, income from the disposition of options and
futures (other than those on foreign currencies) will be subject to the 30%
Limitation if they are held for less than three months. Income from the
disposition of foreign currencies, and options, futures, and forward contracts
on foreign currencies, that are not directly related to the Fund's principal
business of investing in securities (or options and futures with respect to
securities) also will be subject to the 30% Limitation if they are held for
less than three months.
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
30% Limitation. Thus, only the net gain (if any) from the designated hedge
will be included in gross income for purposes of that limitation. The Fund
intends that, when it engages in hedging strategies, the hedging transactions
will qualify for this treatment, but at the present time it is not clear
whether this treatment will be available for all of the Fund's hedging
transactions. To the extent this treatment is not available or is not elected
by the Fund, it may be forced to defer the closing out of certain options,
futures, or forward currency contracts beyond the time when it otherwise would
be advantageous to do so, in order for the Fund to continue to qualify as a
RIC.
For federal income tax purposes, the Fund is required to recognize as
income for each taxable year its net unrealized gains and losses on options,
futures and forward currency contracts that are subject to section 1256 of the
Code ("Section 1256 Contracts") and are held by the Fund as of the end of the
year, as well as gains and losses on Section 1256 Contracts actually realized
during the year. Except for Section 1256 Contracts that are part of a "mixed
straddle" and with respect to which the Fund makes a certain election, any gain
or loss recognized with respect to Section 1256 Contracts is considered to be
60% long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the Section 1256 Contract. Unrealized
gains on Section 1256 Contracts that have been held by the Fund for less than
three months as of the end of its taxable year, and that are recognized for
federal income tax purposes as described above, will not be considered gains on
investments held for less than three months for purposes of the 30% Limitation.
ZERO-COUPON, STEP-COUPON, AND PAY-IN-KIND SECURITIES
The Fund may acquire zero-coupon, step-coupon, or other securities
issued with original issue discount. As a holder of those securities, the Fund
must include in its income the original issue discount that accrues on the
securities during the taxable year, even if the Fund receives no corresponding
payment on the securities during the year. Similarly, the Fund must include in
its income securities it receives as "interest" on pay-in-kind securities.
Because the Fund annually must distribute substantially all of its investment
company taxable income, including any original issue discount and other
non-cash income, to satisfy the Distribution Requirement and avoid imposition
of the Excise Tax, it may be required in a particular year to distribute as a
dividend an amount that is greater than the total amount of cash it actually
receives. Those distributions may be made from the proceeds on sales of
portfolio securities, if necessary. The Fund may realize capital gains or
losses from those sales, which would increase or decrease its investment
company taxable income or net capital gain, or both. In addition, any such
gains may be realized on the disposition of securities held for less than three
months. Because of the 30% Limitation, any such gains would reduce the Fund's
ability to sell other securities, or certain options, futures, or forward
currency contracts, held for less than three months that it might wish to sell
in the ordinary course of its portfolio management.
DETERMINATION OF NET ASSET VALUE
As set forth in the Prospectus under the caption "Shareholder Manual -
Determining Your Share Price," the net asset value of the Fund will be
determined as of the close of trading on each day the New York Stock Exchange
(the "NYSE") is open for trading. The NYSE is open for trading Monday through
Friday except New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Additionally, if any of the
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<PAGE> 35
aforementioned holidays falls on a Saturday, the NYSE will not be open for
trading on the preceding Friday, and when any such holiday falls on a Sunday,
the NYSE will not be open for trading on the succeeding Monday, unless unusual
business conditions exist, such as the ending of a monthly or the yearly
accounting period.
Debt obligations are valued by a pricing service that utilizes
electronic data processing techniques to determine values for normal
institutional-sized trading units of debt obligations without regard to sale or
bid prices when such values are believed to more accurately reflect the fair
market value for such securities. Otherwise, sale or bid prices are used. Any
securities or other assets for which market quotations are not readily
available are valued at fair value as determined in good faith by the Board of
Directors of the Fund. Debt obligations having remaining maturities of 60 days
or less when purchased are valued by the amortized cost method when the Fund's
Board of Directors determines that the fair value of such securities is their
amortized cost. Under this method of valuation, a security is initially valued
at its acquisition cost, and thereafter, amortization of any discount or
premium is assumed each day, regardless of the impact of the fluctuating rates
on the market value of the instrument.
ADDITIONAL SHAREHOLDER INFORMATION
TELEPHONE EXCHANGE AND REDEMPTION PRIVILEGES AND AUTOMATIC EXCHANGE PLAN
Shares of the Fund and any other funds sponsored by the Advisor may be
exchanged for each other at relative net asset values. Exchanges will be
effected by redemption of shares of the Fund held and purchase of shares of the
fund for which Fund shares are being exchanged (the "New Fund"). For federal
income tax purposes, any such exchange constitutes a sale upon which a capital
gain or loss will be realized, depending upon whether the value of the shares
being exchanged is more or less than the shareholder's adjusted cost basis. If
you are interested in exercising any of these exchange privileges, you should
obtain Prospectuses of other funds sponsored by the Advisor from the Advisor.
Upon a telephone exchange, the transfer agent establishes a new account in the
New Fund with the same registration and dividend and capital gains options as
the redeemed account, unless otherwise specified, and confirms the purchase to
you.
The Fund employs reasonable procedures to confirm that instructions
communicated by telephone are genuine. The Fund may not be liable for losses
due to unauthorized or fraudulent instructions. Such procedures include but are
not limited to requiring a form of personal identification prior to acting on
instructions received by telephone, providing written confirmations of such
transactions to the address of record, and tape recording telephone
instructions.
The Telephone Exchange and Redemption Privileges and Automatic
Exchange Plan are available only in states where shares of the New Fund may be
sold, and may be modified or discontinued at any time. Additional information
regarding the Telephone Exchange and Redemption Privileges and Automatic
Exchange Plan is contained in the Fund's Prospectus.
RETIREMENT PLANS
Individual Retirement Account (IRA): Everyone under age 70 1/2 with earned
income may contribute to a tax-deferred IRA. The Strong Funds offer a prototype
plan for you to establish your own IRA. You are allowed to contribute up to the
lesser of $2,000 or 100% of your earned income each year to your IRA. Under
certain circumstances, your contribution will be deductible.
Direct Rollover IRA: To avoid the mandatory 20% federal withholding tax on
distributions, you must transfer the qualified retirement or Code section
403(b) plan distribution directly into an IRA. This tax cannot be avoided if
you receive a distribution and then roll it over into an IRA. The amount of
your Direct Rollover IRA contribution will not be included in your taxable
income for the year.
Simplified Employee Pension Plan (SEP-IRA): A SEP-IRA allows an employer to
make deductible contributions to separate IRA accounts established for each
eligible employee.
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<PAGE> 36
Salary Reduction Simplified Employee Pension Plan (SAR SEP-IRA): A SAR SEP-IRA
is a type of SEP-IRA in which an employer may allow employees to defer part of
their salaries and contribute into an IRA account. These deferrals help lower
the employees' taxable income.
Defined Contribution Plan: A defined contribution plan allows self-employed
individuals, partners, or a corporation to provide retirement benefits for
themselves and their employees. There are three plan types: a profit-sharing
plan, a money purchase pension plan, and a paired plan (a combination of a
profit-sharing plan and a money purchase plan).
401(k) Plan: A 401(k) plan is a type of profit-sharing plan that allows
employees to have part of their salary contributed to a retirement plan which
will earn tax-deferred income. A 401(k) plan is funded by employee
contributions, employer contributions, or a combination of both.
403(b)(7) Plan: A tax-sheltered custodial account designed to qualify under
section 403(b)(7) of the Code is available for use by employees of certain
educational, non-profit, hospital, and charitable organizations.
FUND ORGANIZATION
The Fund is a Wisconsin corporation that is authorized to offer
separate series of shares representing interests in separate portfolios of
securities, each with differing investment objectives. The shares in any one
portfolio may, in turn, be offered in separate classes, each with differing
preferences, limitations or relative rights. However, the Articles of
Incorporation for the Fund provides that if additional classes of shares are
issued by the Fund, such new classes of shares may not affect the preferences,
limitations or relative rights of the Fund's outstanding shares. In addition,
the Board of Directors of the Fund is authorized to allocate assets,
liabilities, income and expenses to each series and class. Classes within a
series may have different expense arrangements than other classes of the same
series and, accordingly, the net asset value of shares within a series may
differ. Finally, all holders of shares of the Fund may vote on each matter
presented to shareholders for action except with respect to any matter which
affects only one or more series or class, in which case only the shares of the
affected series or class are entitled to vote. Fractional shares have the same
rights proportionately as do full shares. Shares of the Fund have no
preemptive, conversion, or subscription rights. The Fund currently has only one
series of Common Stock outstanding. If the Fund issues additional series, the
assets belonging to each series of shares will be held separately by the
custodian, and in effect each series will be a separate fund.
SHAREHOLDER MEETINGS
The Fund is a Wisconsin corporation organized on September 3, 1981 and
currently has 300,000,000 authorized shares of capital stock, $.01 par value.
The Wisconsin Business Corporation Law permits registered investment companies,
such as the Fund, to operate without an annual meeting of shareholders under
specified circumstances if an annual meeting is not required by the 1940 Act.
The Fund has adopted the appropriate provisions in its Bylaws and may, at its
discretion, not hold an annual meeting in any year in which the election of
directors is not required to be acted on by shareholders under the 1940 Act.
The Fund's Bylaws also contain procedures for the removal of directors
by its shareholders. At any meeting of shareholders, duly called and at which
a quorum is present, the shareholders may, by the affirmative vote of the
holders of a majority of the votes entitled to be cast thereon, remove any
director or directors from office and may elect a successor or successors to
fill any resulting vacancies for the unexpired terms of removed directors.
Upon the written request of the holders of shares entitled to not less
than ten percent (10%) of all the votes entitled to be cast at such meeting,
the Secretary of the Fund shall promptly call a special meeting of shareholders
for the purpose of voting upon the question of removal of any director.
Whenever ten or more shareholders of record who have been such for at least six
months preceding the date of application, and who hold in the aggregate either
shares having a net asset value of at least $25,000 or at least one percent
(1%) of the total outstanding shares, whichever is less, shall apply to the
Fund's Secretary in writing, stating that they wish to communicate with other
shareholders with a view to obtaining signatures to a request for a meeting as
described above and accompanied by a form of communication and request which
they wish to transmit, the Secretary shall within five business days after such
application either: (1) afford to such applicants access to a list of the names
and addresses of all
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<PAGE> 37
shareholders as recorded on the books of the Fund; or (2) inform such
applicants as to the approximate number of shareholders of record and the
approximate cost of mailing to them the proposed communication and form of
request.
If the Secretary elects to follow the course specified in clause (2)
of the last sentence of the preceding paragraph, the Secretary, upon the
written request of such applicants, accompanied by a tender of the material to
be mailed and of the reasonable expenses of mailing, shall, with reasonable
promptness, mail such material to all shareholders of record at their addresses
as recorded on the books unless within five business days after such tender the
Secretary shall mail to such applicants and file with the SEC, together with a
copy of the material to be mailed, a written statement signed by at least a
majority of the Board of Directors to the effect that in their opinion either
such material contains untrue statements of fact or omits to state facts
necessary to make the statements contained therein not misleading, or would be
in violation of applicable law, and specifying the basis of such opinion.
After opportunity for hearing upon the objections specified in the
written statement so filed, the SEC may, and if demanded by the Board of
Directors or by such applicants shall, enter an order either sustaining one or
more of such objections or refusing to sustain any of them. If the SEC shall
enter an order refusing to sustain any of such objections, or if, after the
entry of an order sustaining one or more of such objections, the SEC shall
find, after notice and opportunity for hearing, that all objections so
sustained have been met, and shall enter an order so declaring, the Secretary
shall mail copies of such material to all shareholders with reasonable
promptness after the entry of such order and the renewal of such tender.
PERFORMANCE INFORMATION
As described in the "About the Funds - Performance Information"
section in the Prospectus, the Fund's historical performance or return may be
shown in the form of "average annual total return," "total return," and
"cumulative total return." From time to time, the Advisor agrees to waive or
reduce its management fee and to absorb certain operating expenses for the
Fund. Without these waivers and absorption of expenses, the performance
results for the Fund noted herein would have been lower. All performance and
returns noted herein are historical and do not represent the future performance
of the Fund.
AVERAGE ANNUAL TOTAL RETURN
The Fund's average annual total return quotation is computed in
accordance with a standardized method prescribed by rules of the SEC. The
average annual total return for the Fund for a specific period is found by
first taking a hypothetical $10,000 investment ("initial investment") in the
Fund's shares on the first day of the period and computing the "redeemable
value" of that investment at the end of the period. The redeemable value is
then divided by the initial investment, and this quotient is taken to the Nth
root (N representing the number of years in the period) and 1 is subtracted
from the result, which is then expressed as a percentage. The calculation
assumes that all income and capital gains dividends paid by the Fund have been
reinvested at net asset value on the reinvestment dates during the period.
Average annual total return figures for various periods are set forth in the
table below.
TOTAL RETURN
Calculation of the Fund's total return is not subject to a
standardized formula. Total return performance for a specific period is
calculated by first taking an investment (assumed below to be $10,000)
("initial investment") in the Fund's shares on the first day of the period and
computing the "ending value" of that investment at the end of the period. The
total return percentage is then determined by subtracting the initial
investment from the ending value and dividing the remainder by the initial
investment and expressing the result as a percentage. The calculation assumes
that all income and capital gains dividends paid by the Fund have been
reinvested at net asset value on reinvestment dates during the period. Total
return may also be shown as the increased dollar value of the hypothetical
investment over the period. Total return figures for various periods are set
forth in the table below.
CUMULATIVE TOTAL RETURN
Cumulative total return represents the simple change in value of our
investment over a stated period and may be quoted as a percentage or as a
dollar amount. Total returns and cumulative total returns may be broken down
into their components of
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<PAGE> 38
income and capital (including capital gains and changes in share price) in
order to illustrate the relationship between these factors and their
contributions to total return.
The Fund's performance figures are based upon historical results and
do not represent future performance. The Fund's shares are sold at net asset
value per share. The Fund's returns and net asset value will fluctuate and
shares are redeemable at the then current net asset value of the Fund, which
may be more or less than original cost. Factors affecting the Fund's
performance include general market conditions, operating expenses and
investment management. Any additional fees charged by a dealer or other
financial services firm would reduce the returns described in this section.
The figures below show performance information for various periods
ended December 31, 1994. No adjustment has been made for taxes, if any,
payable on dividends. The periods indicated were ones of fluctuating
securities prices.
Strong Asset Allocation Fund
<TABLE>
<CAPTION>
Average
Annual
Total Total
Return Return
------ ------
Initial
$10,000 Ending Value Percentage Percentage
Investment December 31, 1994 Increase Increase
---------- ----------------- -------- --------
<S> <C> <C> <C> <C>
Life of Fund(1) $10,000 $51,679 416.79% 13.47%
Ten Years 10,000 24,338 143.38 9.30
Five Years 10,000 14,314 43.14 7.44
One Year 10,000 9,849 -1.51 -1.51
</TABLE>
- -----------------------------
(1) December 30, 1981
The Fund's total return for the three months ending March 31, 1995 was
3.62%.
COMPARISONS
(1) U.S. TREASURY BILLS, NOTES, OR BONDS
Investors may want to compare the performance of the Fund to that of
U.S. Treasury bills, notes, or bonds, which are issued by the U.S. Government,
because such instruments represent alternative income producing products.
Treasury obligations are issued in selected denominations. Rates of Treasury
obligations are fixed at the time of issuance and payment of principal and
interest is backed by the full faith and credit of the U.S. Treasury. The
market value of such instruments will generally fluctuate inversely with
interest rates prior to maturity and will equal par value at maturity.
Generally, the values of obligations with shorter maturities will fluctuate
less than those with longer maturities.
(2) CERTIFICATES OF DEPOSIT
Investors may want to compare the Fund's performance to that of
certificates of deposit offered by banks and other depositary institutions.
Certificates of deposit represent an alternative income producing product.
Certificates of deposit may offer fixed or variable interest rates and
principal is guaranteed and may be insured. Withdrawal of the deposits prior
to maturity normally will be subject to a penalty. Rates offered by banks and
other depositary institutions are subject to change at any time specified by
the issuing institution.
(3) MONEY MARKET FUNDS
Investors may also want to compare performance of the Fund to that of
money market funds. Money market fund yields will fluctuate and shares are not
insured, but share values usually remain stable.
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<PAGE> 39
(4) LIPPER ANALYTICAL SERVICES, INC. ("LIPPER") AND OTHER INDEPENDENT
RANKING ORGANIZATIONS
From time to time, in marketing and other fund literature, the Fund's
performance may be compared to the performance of other mutual funds in general
or to the performance of particular types of mutual funds, with similar
investment goals, as tracked by independent organizations. Among these
organizations, Lipper, a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and assets, may be
cited. Lipper performance figures are based on changes in net asset value,
with all income and capital gain dividends reinvested. Such calculations do
not include the effect of any sales charges imposed by other funds. The Fund
will be compared to Lipper's appropriate fund category, that is, by fund
objective and portfolio holdings.
(5) MORNINGSTAR, INC.
The Fund's performance may also be compared to the performance of other
mutual funds by Morningstar, Inc. which rates funds on the basis of historical
risk and total return. Morningstar's ratings range from five stars (highest)
to one star (lowest) and represent Morningstar's assessment of the historical
risk level and total return of a fund as a weighted average for 3, 5, and 10
year periods. Ratings are not absolute and do not represent future results.
(6) INDEPENDENT SOURCES
Evaluations of Fund performance made by independent sources may also be
used in advertisements concerning the Fund, including reprints of, or
selections from, editorials or articles about the Fund, especially those with
similar objectives. Sources for Fund performance and articles about the Fund
may include publications such as Money, Forbes, Kiplinger's, Smart Money,
Financial World, Business Week, U.S. News and World Report, The Wall Street
Journal, Barron's and a variety of investment newsletters.
(7) INDICES
The Fund may compare its performance to a wide variety of indices
including the following:
(a) The Consumer Price Index
(b) Dow Jones Average of 30 Industrials
(c) Standard & Poor's 500 Stock Index
(d) NASDAQ Over-the-Counter Composite Index
(e) Russell 2000 Small Stock Index
(f) Russell 3000 Stock Index
(g) Salomon Brothers 3-month Treasury Bill Index
(h) Salomon Brothers Broad Investment-Grade Bond Index
(i) Lehman Brothers Aggregate Bond Index
(j) Lehman Brothers Intermediate Government/Corporate Bond
Index
(k) A blended index consisting of: Standard & Poor's 500
Stock Index (40% weighted), Salomon Brothers Broad
Investment Grade Bond Index (40% weighted), and Salomon
Brothers 3-Month Treasury Bill Index (20% weighted).
There are differences and similarities between the investments that the
Fund may purchase and the investments measured by the indices which are noted
herein.
(8) HISTORICAL ASSET CLASS RETURNS
From time to time, marketing materials may portray the historical
returns of various asset classes. Such presentations will typically compare
the average annual rates of return of inflation, U.S. Treasury bills, bonds,
common stocks, and small stocks. There are important differences between each
of these investments that should be considered in viewing any such comparison.
The market value of stocks will fluctuate with market conditions, and
small-stock prices generally will fluctuate more than large-stock prices. Bond
prices generally will fluctuate inversely with interest rates and other market
conditions, and the prices of bonds with longer maturities generally will
fluctuate more than those of shorter-maturity bonds. Interest rates for bonds
may be fixed at the time of issuance, and payment of principal and interest may
be guaranteed by the issuer and, in the case of U.S. Treasury obligations,
backed by the full faith and credit of the U.S. Treasury.
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<PAGE> 40
(9) STRONG FAMILY OF FUNDS
The Strong Family of Funds offers a comprehensive range of conservative
to aggressive investment options. All of the members of the Strong Family and
their investment objectives are listed below. The Funds are listed in ascending
order of risk and return, as determined by the Funds' Advisor.
<TABLE>
<CAPTION>
FUND NAME INVESTMENT OBJECTIVE
- --------- --------------------
<S> <C>
Strong U.S. Treasury Money Fund Current income, a stable share price and daily liquidity.
Strong Money Market Fund Current income, a stable share price and daily liquidity.
Strong Municipal Money Market Federally tax-exempt current income, a stable share-price and daily
Fund liquidity.
Strong Advantage Fund Current income with a very low degree of share-price fluctuation.
Strong Short-Term Bond Fund Total return by investing for a high level of current income with a low
degree of share-price fluctuation.
Strong Short-Term Municipal Bond Total return by investing for a high level of federally tax-exempt
Fund current income with a low degree of share-price fluctuation.
Strong Short-Term Global Bond Total return by investing for a high level of income with a low degree
Fund of share-price fluctuation.
Strong Government Securities Total return by investing for a high level of current income with a
Fund moderate degree of share-price fluctuation.
Strong Insured Municipal Bond Total return by investing for a high level of federally tax-exempt
Fund current income with a moderate degree of share-price fluctuation.
Strong Municipal Bond Fund Total return by investing for a high level of federally tax-exempt
current income with a moderate degree of share-price fluctuation.
Strong Corporate Bond Fund Total return by investing for a high level of current income with a
moderate degree of share-price fluctuation.
Strong International Bond Fund High total return by investing for both income and capital appreciation.
Strong High-Yield Municipal Bond Total return by investing for a high level of federally tax-exempt
Fund current income.
Strong Asset Allocation Fund High total return consistent with reasonable risk over the long term.
Strong American Utilities Fund Total return by investing for both income and capital growth.
Strong Total Return Fund High total return by investing for capital growth and income.
Strong Opportunity Fund Capital growth.
Strong Special Fund II** Capital growth.
Strong Growth Fund Capital growth.
Strong Common Stock Fund* Capital growth.
Strong Discovery Fund Capital growth.
Strong Discovery Fund II** Capital growth.
Strong International Stock Fund Capital growth.
Strong Asia Pacific Fund Capital growth.
</TABLE>
* The Strong Common Stock Fund is currently closed to new investors.
** The Fund is an investment vehicle that funds variable annuity accounts.
The Fund may from time to time be compared to the other funds in the
Strong Family of Funds based on a risk/reward spectrum. In general, the amount
of risk associated with any investment product is commensurate with that
product's potential level of reward. The Strong Funds risk/reward continuum or
any Fund's position on the continuum may be described or diagrammed in
marketing materials. The Strong Funds risk/reward continuum positions the risk
and reward potential of each Strong Fund relative to the other Strong Funds,
but is not intended to position any Strong Fund relative to other mutual funds
or investment products. Marketing materials may also discuss the relationship
between risk and reward as it relates to an individual investor's portfolio.
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<PAGE> 41
Financial goals vary from person to person. You may choose one or more
of the Strong Funds to help you reach your financial goals. To help you better
understand the Strong Growth and Income Funds, which consist of the Strong
Total Return Fund, the Strong American Utilities Fund and the Strong Asset
Allocation Fund, and determine which Fund or combination of Funds best meets
your personal investment objectives, they are described in the same Prospectus.
Though they appear in the same Prospectus, each of the Growth and Income Funds
is a separately incorporated investment company. Because the Funds share a
Prospectus, there may be the possibility of cross liability between the Funds.
ADDITIONAL FUND INFORMATION
(1) PORTFOLIO CHARACTERISTICS
In order to present a more complete picture of a Fund's portfolio,
marketing materials may include various actual or estimated portfolio
characteristics, including but not limited to median market capitalizations,
earnings per share, alphas, betas, price/earnings ratios, returns on equity,
dividend yields, capitalization ranges, growth rates, price/book ratios, top
holdings, sector breakdowns, asset allocations, quality breakdowns, and
breakdowns by geographic region.
(2) MEASURES OF VOLATILITY AND RELATIVE PERFORMANCE
Occasionally statistics may be used to specify Fund volatility or risk.
The general premise is that greater volatility connotes greater risk undertaken
in achieving performance. Measures of volatility or risk are generally used to
compare the Fund's net asset value or performance relative to a market index.
One measure of volatility is beta. Beta is the volatility of a fund relative
to the total market as represented by the Standard & Poor's 500 Stock Index. A
beta of more than 1.00 indicates volatility greater than the market, and a beta
of less than 1.00 indicates volatility less than the market. Another measure
of volatility or risk is standard deviation. Standard deviation is a
statistical tool that measures the degree to which a fund's performance has
varied from its average performance during a particular time period.
Standard deviation is calculated using the following formula:
Standard deviation = the square root of (summation symbol)(xi - xm)2
n-1
where (summation symbol) = "the sum of",
xi = each individual return during the time period,
xm = the average return over the time period, and
n = the number of individual returns during the time period.
Statistics may also be used to discuss a Fund's relative performance.
One such measure is alpha. Alpha measures the actual return of a fund compared
to the expected return of a fund given its risk (as measured by beta). The
expected return is based on how the market as a whole performed, and how the
particular fund has historically performed against the market. Specifically,
alpha is the actual return less the expected return. The expected return is
computed by multiplying the advance or decline in a market representation by
the fund's beta. A positive alpha quantifies the value that the fund manager
has added, and a negative alpha quantifies the value that the fund manager has
lost.
Other measures of volatility and relative performance may be used as
appropriate. However, all such measures will fluctuate and do not represent
future results.
GENERAL INFORMATION
BUSINESS PHILOSOPHY
The Advisor is an independent, Midwestern-based investment advisor,
owned by professionals active in its management. Recognizing that investors are
the focus of its business, the Advisor strives for excellence both in
investment management and in the service provided to investors. This commitment
affects many aspects of the business, including professional staffing, product
development, investment management, and service delivery. Through its
commitment to excellence, the Advisor intends to benefit investors and to
encourage them to think of Strong Funds as their mutual fund family.
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<PAGE> 42
The increasing complexity of the capital markets requires specialized
skills and processes for each asset class and style. Therefore, the Advisor
believes that active management should produce greater returns than a passively
managed index. The Advisor has brought together a group of top-flight
investment professionals with diverse product expertise, and each concentrates
on their investment specialty. The Advisor believes that people are the firm's
most important asset. For this reason, continuity of professionals is critical
to the firm's long-term success.
INVESTMENT ENVIRONMENT
Discussions of economic, social, and political conditions and their
impact on the Fund may be used in advertisements and sales materials. Such
factors that may impact the Fund include, but are not limited to, changes in
interest rates, political developments, the competitive environment, consumer
behavior, industry trends, technological advances, macroeconomic trends, and
the supply and demand of various financial instruments. In addition, marketing
materials may cite the portfolio management's views or interpretations of such
factors.
PORTFOLIO MANAGEMENT
The Advisor believes that active management is the best way to achieve
the Fund's objective. This policy is based on the fundamental belief that
economic and financial conditions create favorable and unfavorable investment
periods (or seasons) and that these different seasons require different
investment approaches. During favorable investment periods, the Fund seeks to
generate real (inflation plus) growth, and its portfolio may be more heavily
weighted in equities. During uncertain periods, income and capital
preservation may be emphasized, and the Fund's portfolio may be more heavily
weighted in bonds or short-term securities. Through their understanding and
willingness to change with investment cycles or periods, the co-managers of the
Fund seek to achieve the Fund's objectives throughout the seasons of
investment.
The Fund's co-managers intend to employ an investment strategy which
will permit it to participate in a rising market in equities with less risk and
volatility and more income than a fund which concentrates its investments in
stocks. On the other hand, since the Fund's portfolio will generally have
significant holdings in equities, it will be subject to greater volatility and
produce less income than a fund which concentrates its investments solely in
bonds or money market instruments.
In allocating the Fund's assets among equities, bonds, and short-term
securities, the team's lead portfolio manager will employ top-down fundamental
analysis in evaluating the attractiveness of the three asset components on the
basis of economic trends such as inflation, growth of corporate profits and
Federal Reserve Board policies in conjunction with measures of market valuation
such as price-earnings ratios, dividend yields and real interest rates. The
relative weights of the Fund's three asset components are adjusted gradually,
perhaps as often as several times a year, rather than making dramatic
reallocations in anticipation of a major shift in the attractiveness of one
asset category over another. Therefore, the Fund should be viewed as a
long-term investment suitable for investors with an investment horizon of five
years or more. In light of the nature of the Fund and its long-term investment
horizon, it may be most appropriate for persons attempting to achieve long-term
goals such as accumulating funds for retirement, college tuition or a better
life for one's family.
Each portfolio manager works with a team of analysts, traders, and
administrative personnel. From time to time, marketing materials may discuss
various members of the team, including their education, investment experience,
and other credentials.
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<PAGE> 43
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., 411 East Wisconsin Avenue, Milwaukee,
Wisconsin 53202, are the independent accountants for the Fund, providing audit
services and assistance and consultation with respect to the preparation of
filings with the SEC.
LEGAL COUNSEL
Godfrey & Kahn, S.C., Milwaukee, Wisconsin 53202, acts as outside legal
counsel for the Fund.
FINANCIAL STATEMENTS
The Annual Report that is attached hereto contains the following
audited financial information for the Fund:
(a) Schedule of Investments in Securities.
(b) Statement of Operations.
(c) Statement of Assets and Liabilities.
(d) Statement of Changes in Net Assets.
(e) Notes to Financial Statements.
(f) Financial Highlights.
(g) Report of Independent Accountants.
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<PAGE> 44
APPENDIX
BOND RATINGS
STANDARD & POOR'S DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as
a result of changes in, or unavailability of, such information, or for other
circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default -- capacity and willingness of the
obligor as to the timely payment of interest and repayment
of principal in accordance with the terms of the
obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or
other arrangement under the laws of bankruptcy and other
laws affecting creditors' rights.
INVESTMENT GRADE
AAA Debt rated 'AAA' has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A Debt rated 'A' has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
SPECULATIVE GRADE
Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least degree of speculation
and 'C' the highest. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The 'BB' rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied 'BBB-' rating.
A-1
<PAGE> 45
B Debt rated 'B' has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The 'B' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'BB' or 'BB-' rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The 'CCC'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'B' or 'B-' rating.
CC Debt rated 'CC' typically is applied to debt subordinated to senior
debt that is assigned an actual or implied 'CCC' rating.
C Debt rated 'C' typically is applied to debt subordinated to senior
debt which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating
may be used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.
CI The rating 'CI' is reserved for income bonds on which no interest is
being paid.
D Debt rated 'D' is in payment default. The 'D' rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grade period. The 'D' rating also will
be used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
MOODY'S LONG-TERM DEBT RATINGS
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa - Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such Bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes Bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
A-2
<PAGE> 46
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
FITCH INVESTORS SERVICE, INC. BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be
provided by insurance policies or financial guaranties unless otherwise
indicated.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any
security. Ratings do not comment on the adequacy of market price, the
suitability of any security for a particular investor, or the tax-exempt nature
or taxability of payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds
rated 'AAA'. Because bonds rated in the 'AAA' and 'AA'
categories are not significantly vulnerable to foreseeable future
developments, short-term debt of the issuers is generally rated
'F-1+'.
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more vulnerable
to adverse changes in economic conditions and circumstances than
bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in
economic conditions and circumstances, however, are more likely to
have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher
ratings.
A-3
<PAGE> 47
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
('BB' to 'C') represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ('DDD' to 'D') is an
assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories cannot fully reflect the
differences in the degrees of credit risk. Moreover, the character of the risk
factor varies from industry to industry and between corporate, health care and
municipal obligations.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives
can be identified which could assist the obligor in satisfying its
debt service requirements.
B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and interest
reflects the obligor's limited margin of safety and the need for
reasonable business and economic activity throughout the life of
the issue.
CCC Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.
CC Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest or principal.
DDD, DD
and D Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis
of their ultimate recovery value in liquidation or reorganization
of the obligor. 'DDD' represents the highest potential for
recovery of these bonds, and 'D' represents the lowest potential
for recovery.
A-4
<PAGE> 48
DUFF & PHELPS, INC. LONG-TERM DEBT RATINGS
These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks related to
such factors as competition, government action, regulation, technological
obsolescence, demand shifts, cost structure, and management depth and
expertise. The projected viability of the obligor at the trough of the cycle
is a critical determination.
Each rating also takes into account the legal form of the security,
(e.g., first mortgage bonds, subordinated debt, preferred stock, etc.). The
extent of rating dispersion among the various classes of securities is
determined by several factors including relative weightings of the different
security classes in the capital structure, the overall credit strength of the
issuer, and the nature of covenant protection. Review of indenture
restrictions is important to the analysis of a company's operating and
financial constraints.
The Credit Rating Committee formally reviews all ratings once per
quarter (more frequently, if necessary). Ratings of 'BBB-' and higher fall
within the definition of investment grade securities, as defined by bank and
insurance supervisory authorities.
<TABLE>
<CAPTION>
RATING SCALE DEFINITION
<S> <C>
AAA Highest credit quality. The risk factors are negligible, being only slightly
more than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are strong. Risk is modest, but may
AA vary slightly from time to time because of economic conditions.
AA-
A+ Protection factors are average but adequate. However, risk factors are more
A variable and greater in periods of economic stress.
A-
BBB+ Below average protection factors but still considered sufficient for prudent
BBB investment. Considerable variability in risk during economic cycles.
BBB-
BB+ Below investment grade but deemed likely to meet obligations when due.
BB Present or prospective financial protection factors fluctuate according to
BB- industry conditions or company fortunes. Overall quality may move up or
down frequently within this category.
B+ Below investment grade and possessing risk that obligations will not be met
B when due. Financial protection factors will fluctuate widely according to
B- economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
</TABLE>
A-5
<PAGE> 49
<TABLE>
<S> <C>
CCC Well below investment grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection factors
are narrow and risk can be substantial with unfavorable economic/industry
conditions, and/or with unfavorable company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled principal and/or interest payments.
DP Preferred stock with dividend arrearages.
</TABLE>
SHORT-TERM RATINGS
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market.
Ratings graded into several categories, ranging from 'A-1' for the
highest quality obligations to 'D' for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated 'A-1'.
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
B Issues rated 'B' are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with doubtful
capacity for payment.
D Debt rated 'D' is in payment default. The 'D' rating category is
used when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period.
MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months. Moody's
makes no representation as to whether such commercial paper is by any other
definition "commercial paper" or is exempt from registration under the
Securities Act of 1933, as amended.
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations
are exempt from registration under the Securities Act of 1933, nor does it
represent that any specific note is a valid obligation of a rated issuer or
issued in conformity with any applicable law. Moody's employs the following
three designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
A-6
<PAGE> 50
Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
(i) leading market positions in well established industries, (ii) high rates of
return on funds employed, (iii) conservative capitalization structures with
moderate reliance on debt and ample asset protection, (iv) broad margins in
earnings coverage of fixed financial charges and high internal cash generation,
and (v) well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Issuers rated PRIME-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
FITCH INVESTORS SERVICE, INC. SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating
on the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+ (Exceptionally Strong Credit Quality) Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 (Very Strong Credit Quality) Issues assigned this rating
reflect an assurance of timely payment only slightly less
in degree than issues rated 'F-1+'.
F-2 (Good Credit Quality) Issues assigned this rating have a
satisfactory degree of assurance for timely payment but
the margin of safety is not as great as for issues
assigned 'F-1+' and 'F-1' ratings.
F-3 (Fair Credit Quality) Issues assigned this rating have
characteristics suggesting that the degree of assurance
for timely payment is adequate, however, near-term adverse
changes could cause these securities to be rated below
investment grade.
F-S (Weak Credit Quality) Issues assigned this rating have
characteristics suggesting a minimal degree of assurance
for timely payment and are vulnerable to near-term adverse
changes in financial and economic conditions.
D (Default) Issues assigned this rating are in actual or
imminent payment default.
LOC The symbol LOC indicates that the rating is based on a
letter of credit issued by a commercial bank.
A-7
<PAGE> 51
DUFF & PHELPS, INC. SHORT-TERM DEBT RATINGS
Duff & Phelps' short-term ratings are consistent with the rating
criteria utilized by money market participants. The ratings apply to all
obligations with maturities of under one year, including commercial paper, the
uninsured portion of certificates of deposit, unsecured bank loans, master
notes, bankers acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial paper is also rated
according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
Rating Scale: Definition
Duff 1+ Highest certainty of timely payment. Short-term
liquidity, including internal operating factors
and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity
factors are excellent and supported by good
fundamental protection factors. Risk factors are
minor.
Duff 1- High certainty of timely payment. Liquidity factors
are strong and supported by good fundamental
protection factors. Risk factors are very small.
Good Grade
Duff 2 Good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing
funding needs may enlarge total financing
requirements, access to capital markets is good.
Risk factors are small.
Satisfactory Grade
Duff 3 Satisfactory liquidity and other protection factors
qualify issue as to investment grade. Risk factors
are larger and subject to more variation.
Nevertheless, timely payment is expected.
Non-investment Grade
Duff 4 Speculative investment characteristics. Liquidity is
not sufficient to insure against disruption in debt
service. Operating factors and market access may be
subject to a high degree of variation.
Default
Duff 5 Issuer failed to meet scheduled principal and/or
interest payments.
A-8
<PAGE> 52
STRONG ASSET ALLOCATION FUND, INC.
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements (all included or incorporated by
reference in Parts A & B)
Schedules of Investments in Securities
Statements of Operations
Statements of Assets and Liabilities
Statements of Changes in Net Assets
Notes to Financial Statements
Financial Highlights
Report of Independent Accountants
(b) Exhibits
(1) Amended and Restated Articles of Incorporation
(2) Restated By-Laws
(2.1) Amendment to Restated By-Laws
(3) Inapplicable
(4) Specimen Stock Certificate
(5) Investment Advisory Agreement
(6) Distribution Agreement
(7) Inapplicable
(8.1) Custody Agreement
(8.2) Amendment to Custody Agreement
(8.3) Amendment to Custody Agreement
(8.4) Global Custody Agreement
(9) Shareholder Servicing Agent Agreement
(10) Inapplicable
(11) Consent of Auditor
(12) Inapplicable
(13) Inapplicable
(14.1) Prototype Defined Contribution Retirement Plan
with Standardized Adoption Agreements
(14.1.1) Amendment to Prototype Defined Contribution
Retirement Plan with Standardized Adoption Agreements
(14.2) Individual Retirement Custodial Account
(14.2.1) Amendment to Individual Retirement Custodial Account
(14.3) Section 403(b)(7) Retirement Plan
(15) Inapplicable
(16) Computation of Performance Figures
C-1
<PAGE> 53
(17) Power of Attorney
(18) Letter of Representation
(27) Financial Data Schedule
Item 25. Persons Controlled by or under Common Control with Registrant
Registrant neither controls any person nor is under common control
with any other person.
Item 26. Number of Holders of Securities
<TABLE>
<CAPTION>
Number of Record Holders
Title of Class as of January 31, 1995
-------------- ------------------------------
<S> <C>
Common Stock, $.01 par value 23,613
</TABLE>
Item 27. Indemnification
Officers and directors are insured under a joint errors and omissions
insurance policy underwritten by American International Surplus Lines Insurance
Company and First State Insurance Company in the aggregate amount of
$10,000,000, subject to certain deductions.
Article VII of Registrant's Articles of Incorporation provides as
follows:
Subject to the conditions hereinafter set forth, the
Corporation shall indemnify all of its directors and officers, or
former directors and officers, or any person who may have served at
its request as a director, officer, employee or agent, of any other
corporation, partnership, joint venture, trust or other enterprise,
against expenses including attorneys' fees, settlement payments,
judgments and fines, actually and reasonably incurred by them in
connection with any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative
in which they or any of them are made parties or a party by reason of
being or having been a director or officer of the Corporation or of
such other corporation, partnership, joint venture, trust or other
enterprise, except in relation to matters as to which any such
director or officer shall be adjudged in such action, suit or
proceeding to be liable for gross negligence, willful misconduct, bad
faith or reckless disregard of the duties and obligations involved in
the conduct of his office. In the absence of an adjudication which
expressly absolves the director or officer, or in the event of a
settlement, each director and officer shall be indemnified hereunder
only if a majority of a quorum of directors who are neither interested
persons of the Corporation as defined in Section 2(a)(1a) of the
Investment Company Act of 1940 nor parties to the action, suit or
proceeding determine that the director or officer (i) acted in good
faith and in a manner he reasonably believed to be in or not opposed
to the best interests of the Corporation; (ii) with respect to any
criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful; and (iii) was not guilty of gross negligence,
willful misconduct, bad faith or reckless disregard of the duties
involved in the conduct of his office, or such determination shall
have been made by written opinion of independent legal counsel. The
termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself create a presumption that the person
did not act in good faith and in a manner which he reasonably believed
to be in or not opposed to the best interests of the Corporation, and,
with respect to any criminal action or proceeding, had reasonable
cause to believe that his conduct was unlawful. Amounts paid in
settlement shall not exceed costs, fees and expenses which would have
been incurred if the action, suit or proceeding had been litigated to
a conclusion. The rights of any such director or officer to
indemnification shall inure to the benefit of his heirs, executors and
administrators. The Corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director or
officer of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in any
such capacity, or arising out of his status as such, except those
liabilities which the Corporation cannot indemnify directly under the
provisions of this Article. In no event shall Corporation indemnify
any person in contravention of any provisions of the Investment
Company Act of 1940.
C-2
<PAGE> 54
Article VII of Registrant's By-Laws provides as follows:
The corporation shall, to the fullest extent permitted or
required by Sections 180.0850 to 180.0859, inclusive, of the Wisconsin
Business Corporation Law, including any amendments thereto (but in the
case of any such amendment, only to the extent such amendment permits
or requires the corporation to provide broader indemnification rights
than prior to such amendment), indemnify its Directors and Officers
against any and all Liabilities, and advance any and all reasonable
Expenses, incurred thereby in any Proceeding to which any such
Director or Officer is a Party because he or she is or was a Director
or Officer of the corporation. The corporation shall also indemnify
an employee who is not a Director or Officer, to the extent that the
employee has been successful on the merits or otherwise in defense of
a Proceeding, for all Expenses incurred in the Proceeding if the
employee was a Party because he or she is or was an employee of the
corporation. The rights to indemnification granted hereunder shall
not be deemed exclusive of any other rights to indemnification against
Liabilities or the advancement of Expenses which a Director, Officer
or employee may be entitled under any written agreement, Board
resolution, vote of shareholders, the Wisconsin Business Corporation
Law or otherwise. The corporation may, but shall not be required to,
supplement the foregoing rights to indemnification against Liabilities
and advancement of Expenses under this Section 7.01 by the purchase of
insurance on behalf of any one or more of such Directors, Officers or
employees, whether or not the corporation would be obligated to
indemnify or advance Expenses to such Director, Officer or employee
under this Section 7.01. All capitalized terms used in this Article
VII and not otherwise defined herein shall have the meaning set forth
in Section 180.0850 of the Wisconsin Business Corporation law.
Notwithstanding anything herein to the contrary, in no event shall the
corporation indemnify any person hereunder in contravention of any
provision of the Investment Company Act of 1940.
Item 28. Business and Other Connections of Investment Advisor
The information contained under "About the Funds - Management" in the
Prospectus and under "Directors and Officers of the Fund" and "Investment
Advisor and Distributor" in the Statement of Additional Information is hereby
incorporated by reference pursuant to Rule 411 under the Securities Act of
1933.
Item 29. Principal Underwriters
(a) Strong Funds Distributors, Inc., principal underwriter for
Registrant, also serves as principal underwriter for Strong Advantage Fund,
Inc.; Strong American Utilities Fund, Inc.; Strong Asia Pacific Fund, Inc.;
Strong Common Stock Fund, Inc.; Strong Corporate Bond Fund, Inc.; Strong
Discovery Fund II, Inc.; Strong Discovery Fund, Inc.; Strong Government
Securities Fund, Inc.; Strong Growth Fund, Inc.; Strong High-Yield Municipal
Bond Fund, Inc.; Strong Insured Municipal Bond Fund, Inc.; Strong International
Bond Fund, Inc.; Strong International Stock Fund, Inc.; Strong Money Market
Fund, Inc.; Strong Municipal Bond Fund, Inc.; Strong Municipal Money Market
Fund, Inc.; Strong Opportunity Fund, Inc.; Strong Short-Term Bond Fund, Inc.;
Strong Short-Term Global Bond Fund, Inc.; Strong Short-Term Municipal Bond
Fund, Inc.; Strong Special Fund II, Inc.; Strong Total Return Fund, Inc.; and
Strong U.S. Treasury Money Fund, Inc.
(b) The information contained under "About the Funds - Management" in
the Prospectus and under "Directors and Officers of the Fund" and "Investment
Advisor and Distributor" in the Statement of Additional Information is hereby
incorporated by reference pursuant to Rule 411 under the Securities Act of
1933.
(c) None
Item 30. Location of Accounts and Records
All accounts, books, or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are in the physical possession of Registrant's Treasurer, Ronald A.
Neville, at Registrant's corporate offices, 100 Heritage Reserve, Menomonee
Falls, Wisconsin 53051.
C-3
<PAGE> 55
Item 31. Management Services
All management-related service contracts entered into by Registrant
are discussed in Parts A and B of this Registration Statement.
Item 32. Undertakings
The Registrant undertakes to furnish to each person to whom a
prospectus is delivered, upon request and without charge, a copy of the
Registrant's latest annual report to shareholders.
C-4
<PAGE> 56
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant hereby certifies that this Post-
Effective Amendment No. 20 meets all the requirements for effectiveness
pursuant to paragraph (b) of Rule 485 under the Securities Act of 1933, as
amended, and that it has duly caused this Post-Effective Amendment No. 20 to
the Registration Statement on Form N-1A to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Village of Menomonee Falls, and
State of Wisconsin on the 13th day of April, 1995.
STRONG ASSET ALLOCATION FUND, INC.
(Registrant)
BY:/s/ John Dragisic
----------------------------
John Dragisic, Vice Chairman
Each person whose signature appears below constitutes and appoints John
Dragisic, Thomas P. Lemke, Lawrence A. Totsky, and Ann E. Oglanian, and each of
them, his true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all post-effective amendments to this
Registration Statement on Form N-1A and to file the same, with all exhibits
thereto, and any other documents in connection therewith, with the Securities
and Exchange Commission and any other regulatory body, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes, as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 20 to the Registration Statement on Form N-1A has
been signed below by the following persons in the capacities and on the date
indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ John Dragisic Vice Chairman of the Board (Principal
- ---------------------------------- Executive Officer) and a Director April 13, 1995
John Dragisic
/s/ Ronald A. Neville Treasurer (Principal Financial and
- ---------------------------------- Accounting Officer) April 13, 1995
Ronald A. Neville
/s/ Richard S. Strong Chairman of the Board and a Director April 13, 1995
- ----------------------------------
Richard S. Strong
/s/ Marvin E. Nevins Director April 13, 1995
- ----------------------------------
Marvin E. Nevins
/s/ Willie D. Davis Director April 13, 1995
- ----------------------------------
Willie D. Davis
/s/ William F. Vogt Director April 13, 1995
- ----------------------------------
William F. Vogt
/s/ Stanley Kritzik Director April 13, 1995
- ----------------------------------
Stanley Kritzik
</TABLE>
<PAGE> 57
EXHIBIT INDEX
<TABLE>
<CAPTION>
EDGAR
Exhibit No. Exhibit Exhibit No.
----------- ------- -------------
<S> <C> <C>
(1) Amended and Restated Articles of Incorporation EX-99.B1
(2) Restated By-Laws(6)
(2.1) Amendment to Restated By-Laws EX-99.B2.1
(3) Inapplicable
(4) Specimen Stock Certificate EX-99.B4(7)
(5) Investment Advisory Agreement EX-99.B5
(6) Distribution Agreement(3)
(7) Inapplicable
(8.1) Custody Agreement(1)
(8.2) Amendment to Custody Agreement(2)
(8.3) Amendment to Custody Agreement(4)
(8.4) Global Custody Agreement(5)
(9) Shareholder Servicing Agent Agreement(4)
(10) Inapplicable
(11) Consent of Auditor EX-99.B11
(12) Inapplicable
(13) Inapplicable
(14.1) Prototype Defined Contribution Retirement Plan with Standardized Adoption
Agreements(5)
(14.1.1) Amendment to Prototype Defined Contribution Retirement Plan with EX-99.B14.1.1
Standardized Adoption Agreements
(14.2) Individual Retirement Custodial Account(5)
(14.2.1) Amendment to Individual Retirement Custodial Account EX-99.B14.2.1
(14.3) Section 403(b)(7) Retirement Plan(5)
(15) Inapplicable
(16) Computation of Performance Figures EX-99.B16(7)
(17) Power of Attorney (See Signature Page)
(18) Letter of Representation EX-99.B18
(27) Financial Data Schedule EX-27.CLASSA
</TABLE>
- ---------------
(1) Incorporated herein by reference to Amendment No. 1 to the Registration
Statement on Form N-1A of Registrant.
(2) Incorporated herein by reference to Exhibit 8 to Amendment No. 3 to the
Registration Statement on Form N-1A of Registrant.
(3) Incorporated herein by reference to Amendment No. 7 to the Registration
Statement on Form N-1A of Registrant.
(4) Incorporated herein by reference to Amendment No. 10 of the Registration
Statement on Form N-1A of Registrant.
(5) Incorporated herein by reference to Post-Effective Amendment No. 16 of the
Registration Statement on Form N-1A of Registrant filed on or about April
28, 1994.
(6) Incorporated herein by reference to Post-Effective Amendment No. 18 of the
Registration Statement on Form N-1A of Registrant filed on or about
December 21, 1994.
(7) Incorporated herein by reference to Post-Effective Amendment No. 19 to the
Registration Statement on Form N-1A of Registrant filed on or about
February 24, 1995.
<PAGE> 1
Ex-99.B1
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF STRONG FUND, INC.
These Amended and Restated Articles of Incorporation are executed by the
undersigned to supersede and replace the heretofore existing Articles of
Incorporation of Strong Fund, Inc. [as amended] a corporation
organized under Chapter 180 of the Wisconsin Statutes:
ARTICLE I
The name of the corporation (hereinafter, the "Corporation") is:
Strong Fund, Inc.
ARTICLE II
The period of existence of the Corporation shall be perpetual.
ARTICLE III
The purpose for which the Corporation is organized is, without limitation,
to act as an investment company pursuant to the Investment Company Act of 1940,
as amended from time to time (the "Investment Company Act"), and for any other
purposes for which corporations may be organized under Chapter 180 of the
Wisconsin Statutes, as amended from time to time (the "WBCL").
ARTICLE IV
A. The aggregate number of shares which the Corporation shall have the
authority to issue is [(0,000,000,000)] with a par value of [
($0. )] per share, initially consisting of a single class designated as Common
Stock. Prior to the reclassification of any unissued shares of the
Corporation's Common Stock, such Common Stock shall have unlimited voting
rights as provided by the WBCL, shall be entitled to receive the net assets of
the Corporation upon liquidation and shall be entitled to such dividends or
distributions, in shares or in cash or in both, as may be declared from time to
time by the Board of Directors. The Board of Directors shall have the authority
to redesignate the outstanding Common Stock upon the reclassification of any
unissued shares of Common Stock into different classes and series of classes,
provided the redesignation does not affect the preferences, limitations, and
relative rights of outstanding shares of Common Stock (or such other
designation for such Common Stock as is determined by the Board of Directors
pursuant to this sentence) and upon such redesignation and reclassification,
outstanding shares shall be subject to subparagraphs 1-7 of paragraph B of this
Article IV. Thereafter, the Corporation's Common Stock shall consist of such
classes and series as is designated by the Board of Directors in accordance
with paragraph B of this Article IV.
B. The Board of Directors is authorized to classify or to reclassify
(i.e. into classes and series of classes), from time to time, any unissued
shares of the Corporation, whether now or hereafter authorized, by setting,
changing, or eliminating the distinguishing designation and the preferences,
limitations, and relative rights, in whole or in part, to the fullest extent
permissible under the WBCL.
Unless otherwise provided by the Board of Directors prior to the issuance
of shares, the shares of any and all classes and series shall be subject to the
following:
1. The Board of Directors may redesignate a class or series
whether or not shares of such class or series are issued and outstanding,
provided that such redesignation does not affect the preferences, limitations,
and relative rights, in whole or in part, of such class or series.
2. The assets and liabilities and the income and expenses for
each class shall be attributable to that class. The assets and liabilities and
the income and expenses of each series within a class shall be determined
separately
<PAGE> 2
and, accordingly, the net asset value of shares may vary from series to series
within a class. The income or gain and the expense or liabilities of the
Corporation shall be allocated to each class or series as determined by or
under the direction of the Board of Directors.
3. Shares of each class or series shall be entitled to such
dividends or distributions, in shares or in cash or both, as may be declared
from time to time by the Board of Directors with respect to such class or
series. Dividends or distributions shall be paid on shares of a class or series
only out of the assets belonging to that class or series.
4. Any shares redeemed by the Corporation shall be deemed to be
canceled and restored to the status of authorized but unissued shares of the
particular class or series.
5. In the event of the liquidation or dissolution of the
Corporation, the holders of a class or series shall be entitled to receive, as
a class or series, out of the assets of the Corporation available for
distribution to shareholders, the assets belonging to that class or series less
the liabilities allocated to that class or series. The assets so distributable
to the holders of a class or series shall be distributed among such holders in
proportion to the number of shares of that class or series held by them and
recorded on the books of the Corporation. In the event that there are any
assets available for distribution that are not attributable to any particular
class or series, such assets shall be allocated to all classes or series in
proportion to the net asset value of the respective class or series.
6. All holders of shares shall vote as a single class and series
except with respect to any matter which affects only one or more series or
class of shares, in which case only the holders of shares of the class or
series affected shall be entitled to vote.
7. For purposes of the Corporation's Registration Statement filed
with the Securities and Exchange Commission under the Securities Act of 1933
and the Investment Company Act of 1940, including all prospectuses and
Statements of Additional Information, and other reports filed under the
Investment Company Act of 1940, references therein to "classes" of the
Corporation's common stock shall mean "series", as used in these Articles of
Incorporation and the WBCL, and references therein to "series" shall mean
"class", as used in these Articles of Incorporation and the WBCL.
C. The Corporation may issue fractional shares. Any fractional shares
shall carry proportionately all the rights of whole shares, including, without
limitation, the right to vote and the right to receive dividends and
distributions.
D. The Board of Directors of the Corporation may authorize the issuance
and sale of any class or series of shares from time to time in such amount and
on such terms and conditions, for such purposes and for such amounts or kind of
consideration as the Board of Directors shall determine, subject to any limits
required by then applicable law. Nothing in this paragraph shall be construed
in any way as limiting the Board of Directors authority to issue the
Corporation's shares in connection with a share dividend under the WBCL.
E. Subject to the suspension of the right of redemption or postponement
of the date of payment or satisfaction upon redemption in accordance with the
Investment Company Act, each holder of any class or series of the Common Stock
of the Corporation, upon request and after complying with the redemption
procedures established by or under the supervision of the Board of Directors,
shall be entitled to require the Corporation to redeem out of legally available
funds all or any part of the Common Stock standing in the name of such holder
on the books of the Corporation at the net asset value (as determined in
accordance with the Investment Company Act) of such shares (less any applicable
redemption fee). Any such redeemed shares shall be cancelled and restored to
the status of authorized but unissued shares.
F. The Board of Directors may authorize the Corporation, at its option
and to the extent permitted by and in accordance with the Investment Company
Act, to redeem any shares of Common Stock of any class or series of the
Corporation owned by any shareholder under circumstances deemed appropriate by
the Board of Directors in its sole discretion from time to time, including
without limitation the failure to maintain ownership of a specified minimum
number or value of shares of common stock of any class or series of the
Corporation, at the net asset value (as determined in accordance with the
Investment Company Act) of such shares (less any applicable redemption fee).
<PAGE> 3
G. The Board of Directors of the Corporation may, upon reasonable notice
to the holders of Common Stock of any class or series of the Corporation,
impose a fee for the redemption of shares, such fee to be not in excess of the
amount set forth in the Corporation's then existing By-Laws and to apply in the
case of such redemptions and under such terms and conditions as the Board of
Directors shall determine. The Board of Directors shall have the authority to
rescind imposition of any such fee in its discretion and to reimpose the
redemption fee from time to time upon reasonable notice.
H. No holder of the Common Stock of any class or series of the
Corporation shall, as such holder, have any right to purchase or subscribe for
any shares of the Common Stock of any class or series of the Corporation which
it may issue or sell (whether out of the number of shares authorized by these
Articles of Incorporation, or out of any shares of the Common Stock of any
class or series of the Corporation acquired by it after the issue thereof, or
otherwise) other than such right, if any, as the Board of Directors, in its
sole discretion, may determine.
I. With respect to any class or series, the Board of Directors may adopt
provisions to seek to maintain a stable net asset value per share. Without
limiting the foregoing, the Board of Directors may determine that the net asset
value per share of any class or series should be maintained at a designated
constant value and may establish procedures, not inconsistent with applicable
law, to accomplish that result. Such procedures may include a requirement, in
the event of a net loss with respect to the particular class or series from
time to time, for automatic pro rata capital contributions from each
shareholder of that class or series in amounts sufficient to maintain the
designated constant share value.
ARTICLE V
The number of directors shall be fixed by the By-Laws of the Corporation.
ARTICLE VI
The Corporation reserves the right to enter into, from time to time,
investment advisory agreements providing for the management and supervision of
the investments of the Corporation, the furnishing of advice to the Corporation
with respect to the desirability of investing in, purchasing or selling
securities or other assets and the furnishing of clerical and administrative
services to the Corporation. Such agreements shall contain such other terms,
provisions and conditions as the Board of Directors of the Corporation may deem
advisable and as are permitted by the Investment Company Act.
The Corporation may, without limitation, designate distributors,
custodians, transfer agents, registrars and/or disbursing agents for the stock
and assets of the Corporation and employ and fix the powers, rights, duties,
responsibilities and compensation of each such distributor, custodian, transfer
agent, registrar and/or disbursing agent.
ARTICLE VII
If the Board of Directors redesignate the outstanding Common Stock in
accordance with paragraph A of Article IV, the Board of Directors shall
designate the Corporation with a generic name that is consistent with the name
of the first series and any subsequent series.
ARTICLE VIII
The registered office of the Corporation is located at 100 Heritage
Reserve, in the Village of Menomonee Falls, Waukesha County, Wisconsin 53051
and the name of the registered agent at such address is .
Executed this day of , 1995.
-----------------------------
[Name], Secretary
<PAGE> 1
EXHIBIT 99.B2.1
AMENDMENT TO BYLAWS
On January 20, 1995, the Board of Directors amended the second
sentence of Article III, Section 3.01 of the Bylaws of Strong _______ Fund,
Inc. dated ________ to read as follows:
"The number of directors of the corporation shall be six."
<PAGE> 1
Ex-99.B5
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made and entered into on this day of ,
19 , between STRONG , INC., a Wisconsin corporation (the
"Fund"), and STRONG CAPITAL MANAGEMENT, INC., a Wisconsin corporation (the
"Adviser");
WITNESSETH
WHEREAS, the Fund is registered with the Securities and Exchange
Commission as an open-end management investment company under the Investment
Company Act of 1940 (the "1940 Act");
WHEREAS, the Fund is authorized to create separate series, each with
its own separate investment portfolio; and,
WHEREAS, the Fund desires to retain the Adviser, which is a registered
investment adviser under the Investment Advisers Act of 1940, to act as
investment adviser for the Fund or each series of the Fund, if any, listed in
Schedule A attached hereto, and to manage each of their assets;
NOW, THEREFORE, the Fund and the Adviser do mutually agree and promise
as follows:
1. Employment. The Fund hereby appoints Adviser as investment
adviser for the Fund or each series of the Fund, if any, listed on Schedule A
attached hereto (a "Portfolio" or collectively, the "Portfolios"), and Adviser
accepts such appointment. Subject to the supervision of the Board of Directors
of the Fund and the terms of this Agreement, the Adviser shall act as
investment adviser for and manage the investment and reinvestment of the assets
of any Portfolio. The Adviser is hereby authorized to delegate some or all of
its services subject to necessary approval, which includes without limitation,
the delegation of its investment adviser duties hereunder to a subadvisor
pursuant to a written agreement (a "Subadvisory Agreement") under which the
subadvisor shall furnish the services specified therein to the Adviser. The
Adviser will continue to have responsibility for all investment advisory
services furnished pursuant to a Subadvisory Agreement. The Adviser shall (i)
provide for use by the Fund, at the Adviser's expense, office space and all
necessary office facilities, equipment and personnel for servicing the
investments of each Portfolio and maintaining the Fund's organization, (ii) pay
the salaries and fees of all officers and directors of the Fund who are
"interested persons" of the Adviser as such term is defined under the 1940 Act,
and (iii) pay for all clerical services relating to research, statistical and
investment work.
2. Allocation of Portfolio Brokerage. The Adviser is authorized,
subject to the supervision of the Board of Directors of the Fund, to place
orders for the purchase and sale of securities and to negotiate commissions to
be paid on such transactions. The Adviser may, on behalf of each Portfolio, pay
brokerage commissions to a broker which provides brokerage and research
services to the Adviser in excess of the amount another broker would have
charged for effecting the transaction, provided (i) the Adviser determines in
good faith that the amount is reasonable in relation to the value of the
brokerage and research services provided by the executing broker in terms of
the particular transaction or in terms of the Adviser's overall
responsibilities with respect to a Portfolio and the accounts as to which the
Adviser exercises investment discretion, (ii) such payment is made in
compliance with Section 28(e) of the Securities Exchange Act of
<PAGE> 2
1934 and other applicable state and federal laws, and (iii) in the opinion of
the Adviser, the total commissions paid by a Portfolio will be reasonable in
relation to the benefits to such Portfolio over the long term.
3. Expenses. Each Portfolio will pay all its expenses and the
Portfolio's allocable share of Fund expenses, other than those expressly stated
to be payable by the Adviser hereunder, which expenses payable by a Portfolio
shall include, without limitation, interest charges, taxes, brokerage
commissions and similar expenses, expenses of issue, sale, repurchase or
redemption of shares, expenses of registering or qualifying shares for sale,
expenses of printing and distributing prospectuses to existing shareholders,
charges of custodians (including sums as custodian and for keeping books and
similar services of the Portfolios), transfer agents (including the printing
and mailing of reports and notices to shareholders), registrars, auditing and
legal services, clerical services related to recordkeeping and shareholder
relations, printing of share certificates, fees for directors who are not
"interested persons" of the Adviser, and other expenses not expressly assumed
by the Adviser under Paragraph 1 above. If expenses payable by a Portfolio,
except interest charges, taxes, brokerage commissions and similar fees, and to
the extent permitted, extraordinary expenses, in any given fiscal year exceed
that percentage of the average net asset value of the Portfolio for such year,
as determined by valuations made as of the close of each business day of such
year, which is the most restrictive percentage expense limitation provided by
the laws of the various states in which the Portfolio's shares are qualified
for sale, or if the states in which the shares qualified for sale impose no
restrictions, then 2%, the Adviser shall reimburse the Portfolio for such
excess. Reimbursement of expenses by the Adviser shall be made on a monthly
basis and will be paid to a Portfolio by a reduction in the Adviser's fee,
subject to later adjustment month by month for the remainder of the Fund's
fiscal year.
4. Authority of Adviser. The Adviser shall for all purposes
herein be considered an independent contractor and shall not, unless expressly
authorized and empowered by the Fund or any Portfolio, have authority to act
for or represent the Fund or any Portfolio in any way, form or manner. Any
authority granted by the Fund on behalf of itself or any Portfolio to the
Adviser shall be in the form of a resolution or resolutions adopted by the
Board of Directors of the Fund.
5. Compensation of Adviser. For the services to be furnished
during any month by the Adviser hereunder, each Portfolio listed in Schedule A
shall pay the Adviser, and the Adviser agrees to accept as full compensation
for all services rendered hereunder, an Advisory Fee as soon as practical after
the last day of such month. The Advisory Fee shall be an amount equal to 1/12th
of the annual fee as set forth in Schedule B of the average of the net asset
value of the Portfolio determined as of the close of business on each business
day throughout the month (the "Average Asset Value"). In case of termination of
this Agreement with respect to any Portfolio during any month, the fee for that
month shall be reduced proportionately on the basis of the number of calendar
days during which it is in effect and the fee computed upon the Average Asset
Value of the business days during which it is so in effect.
6. Rights and Powers of Adviser. The Adviser's rights and powers
with respect to acting for and on behalf of the Fund or any Portfolio,
including the rights and powers of the Adviser's officers and directors, shall
be as follows:
2
<PAGE> 3
(a) Directors, officers, agents and shareholders of the Fund are
or may at any time or times be interested in the Adviser as officers,
directors, agents, shareholders or otherwise. Correspondingly, directors,
officers, agents and shareholders of the Adviser are or may at any time or
times be interested in the Fund as directors, officers, agents and as
shareholders or otherwise, but nothing herein shall be deemed to require the
Fund to take any action contrary to its Articles of Incorporation or any
applicable statute or regulation. The Adviser shall, if it so elects, also have
the right to be a shareholder in any Portfolio.
(b) Except for initial investments in a Portfolio, not in excess
of $100,000 in the aggregate for the Fund, the Adviser shall not take any long
or short positions in the shares of the Portfolios and that insofar as it can
control the situation it shall prevent any and all of its officers, directors,
agents or shareholders from taking any long or short position in the shares of
the Portfolios. This prohibition shall not in any way be considered to prevent
the Adviser or an officer, director, agent or shareholder of the Adviser from
purchasing and owning shares of any of the Portfolios for investment purposes.
The Adviser shall notify the Fund of any sales of shares of any Portfolio made
by the Adviser within two months after purchase by the Adviser of shares of any
Portfolio.
(c) The services of the Adviser to each Portfolio and the Fund are
not to be deemed exclusive and Adviser shall be free to render similar services
to others as long as its services for others does not in any way hinder,
preclude or prevent the Adviser from performing its duties and obligations
under this Agreement. In the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of obligations or duties hereunder on the part
of the Adviser, the Adviser shall not be subject to liability to the Fund or to
any of the Portfolios or to any shareholder for any act or omission in the
course of, or connected with, rendering services hereunder or for any losses
that may be sustained in the purchase, holding or sale of any security.
7. Duration and Termination. The following shall apply with
respect to the duration and termination of this Agreement:
(a) This Agreement shall begin for each Portfolio as of the date
of this Agreement and shall continue in effect for two years. With respect to
each Portfolio added by execution of an Addendum to Schedule A, the term of
this Agreement shall begin on the date of such execution and, unless sooner
terminated as hereinafter provided, this Agreement shall remain in effect to
the date two years after such execution. Thereafter, in each case, this
Agreement shall remain in effect, for successive periods of one year, subject
to the provisions for termination and all of the other terms and conditions
hereof if: (a) such continuation shall be specifically approved at least
annually by either (i) the affirmative vote of a majority of the Board of
Directors of the Fund, including a majority of the Directors who are not
parties to this Agreement or interested persons of any such party (other than
as Directors of the Fund), cast in person at a meeting called for that purpose
or (ii) by the affirmative vote of a majority of a Portfolio's outstanding
voting securities; and (b) Adviser shall not have notified a Portfolio in
writing at least sixty (60) days prior to the anniversary date of this
Agreement in any year thereafter that it does not desire such continuation with
respect to that Portfolio. Prior to voting on the renewal of this Agreement,
the Board of Directors of the Fund may request and evaluate, and the Adviser
shall furnish, such information as may reasonably be necessary to enable the
Fund's Board of Directors to evaluate the terms of this Agreement.
3
<PAGE> 4
(b) Notwithstanding whatever may be provided herein to the
contrary, this Agreement may be terminated at any time with respect to any
Portfolio, without payment of any penalty, by affirmative vote of a majority of
the Board of Directors of the Fund, or by vote of a majority of the outstanding
voting securities of that Portfolio, as defined in Section 2(a)(42) of the 1940
Act, or by the Adviser, in each case, upon sixty (60) days' written notice to
the other party and shall terminate automatically in the event of its
assignment.
8. Amendment. This Agreement may be amended by mutual consent of
the parties, provided that the terms of each such amendment shall be approved
by the vote of a majority of the Board of Directors of the Fund, including a
majority of the Directors who are not parties to this Agreement or interested
persons of any such party to this Agreement (other than as Directors of the
Fund) cast in person at a meeting called for that purpose, and, where required
by Section 15(a)(2) of the 1940 Act, on behalf of a Portfolio by a majority of
the outstanding voting securities (as defined in Section 2(a)(42) of the 1940
Act) of such Portfolio. If such amendment is proposed in order to comply with
the recommendations or requirements of the Securities and Exchange Commission
or state regulatory bodies or other governmental authority, or to obtain any
advantage under state or federal laws, the Fund shall notify the Adviser of the
form of amendment which it deems necessary or advisable and the reasons
therefor, and if the Adviser declines to assent to such amendment, the Fund may
terminate this Agreement forthwith.
9. Notice. Any notice that is required to be given by the parties
to each other under the terms of this Agreement shall be in writing, addressed
and delivered, or mailed postpaid to the other party at the principal place of
business of such party.
10. Assignment. This Agreement shall neither be assignable nor
subject to pledge or hypothecation and in the event of assignment, pledge or
hypothecation shall automatically terminate. For purposes of determining
whether an "assignment" has occurred, the definition of "assignment" in Section
2(a)(4) of the 1940 Act shall control.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be signed as of the day and year first stated above.
Attest: Strong Capital Management, Inc.
- ------------------------------------- -------------------------------------
[Name and Title] [Name and Title]
Attest: [Name of Fund]
- ------------------------------------- -------------------------------------
[Name and Title] [Name and Title]
4
<PAGE> 5
SCHEDULE A
The Portfolio(s) of Strong , Inc. currently subject to this
Agreement are as follows:
Date of Addition
Portfolio(s) to this Agreement
------------ -----------------
5
<PAGE> 6
SCHEDULE B
Compensation pursuant to Paragraph 5 of this Agreement shall be calculated in
accordance with the following schedules:
Portfolio(s) Annual Fee
------------ ----------
6
<PAGE> 1
Ex-99.B11
[Coopers & Lybrand L.L.P. Letterhead]
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Strong Asset Allocation Fund, Inc.
We consent to the inclusion in Post-Effective Amendment No. 20 to the
Registration Statement of Strong Asset Allocation Fund, Inc. on Form N-1A of
our report dated January 24, 1995 on our audit of the financial statements and
financial highlights of the Fund, which report is included in the Annual Report
to Shareholders for the year ended December 31, 1994, which is also included in
the Registration Statement. We also consent to the reference to our Firm under
the caption "Independent Accountants" in the Statement of Additional
Information and under the caption "Financial Highlights" in the Prospectus.
/s/ COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
April 14, 1995
<PAGE> 1
Ex-99.B14.1.1
[STRONG LOGO]
AMENDMENTS TO THE
STRONG FUNDS PROTOTYPE DEFINED CONTRIBUTION PLAN ("PLAN")
The following amendments have been made to the Plan, effective on the
first day of the first plan year beginning on or after January 1, 1994:
1. Section 2.6 is amended by inserting into the conclusion of the current
provision the following:
In addition to other applicable limitations set forth in the
plan, and notwithstanding any other provision of the plan to the
contrary, for plan years beginning on or after January 1, 1994, the
annual Compensation of each employee taken into account under the plan
shall not exceed the OBRA '93 annual compensation limit. The OBRA '93
annual compensation limit is $150,000, as adjusted by the Commissioner
for increases in the cost of living in accordance with section
401(a)(17)(B) of the Internal Revenue Code. The cost-of-living
adjustment in effect for a calendar year applies to any period, not
exceeding 12 months, over which compensation is determined
(determination period) beginning in such calendar year. If a
determination period consists of fewer than 12 months, the OBRA '93
annual compensation limit will be multiplied by a fraction, the
numerator of which is the number of months in the determination period,
and the denominator of which is 12.
For plan years beginning on or after January 1, 1994, any
reference in this plan to the limitation under section 401(a)(17) of
the Code shall mean the OBRA '93 annual compensation limit set
forth in this provision.
If Compensation for any prior determination period is taken
into account in determining an employee's benefits accruing in the
current plan year, the compensation for that prior determination
period is subject to OBRA '93 annual compensation limit in effect for
that prior determination period. For this purpose, for determination
periods beginning before the first day of the first plan year beginning
on or after January 1, 1994, the OBRA '93 annual compensation limit is
$150,000.
2. The first paragraph of Section 8.3(b) is amended to read as follows:
(b) If the Participant's vested Account balance in the Pension
Plan or the Profit Sharing Plan exceeds (or at the time of any prior
distribution exceeded) three thousand five hundred dollars
($3,500), no distribution of that interest shall be made prior to the
time the Participant's Account becomes immediately distributable
without the written consent of the Participant and, in the case of the
Pension Plan, the Participant's spouse (or where either the Participant
or the spouse has died, the survivor). The consent of the Participant
and the Participant's spouse shall be obtained in writing within the
ninety (90) day period ending on the annuity starting date. The annuity
starting date is the first day of the first period for which an amount
is paid as an annuity or any other form. The Administrator shall notify
the Participant and the Participant's spouse of the right to defer any
distribution until the Participant's Account balance is no longer
immediately distributable. Such notification shall include a general
description of the material features, and an explanation of the
relative values of the optional forms of benefit available under the
Plan in a manner that would satisfy the notice requirements of Code
Section 417(a)(3), and shall be provided no less than thirty (30) days
and no more than ninety (90) days prior to the annuity starting date;
provided that if a distribution is one to which Sections 401(a)(11) and
417 of the Internal Revenue Code do not apply, such distribution may
commence less than 30 days after the notice required under Section
1.411(a)-11(c) of the Income Tax Regulations is given, provided that:
(1) the Administrator clearly informs the Participant
that the Participant has a right to a period of at least 30
days after receiving the notice to consider the decision of
whether or not to elect a distribution (and, if applicable, a
particular distribution option), and
(2) the Participant, after receiving the notice,
affirmatively elects a distribution.
<PAGE> 1
EX-99.B14.2.1
[STRONG LOGO]
AMENDMENTS TO IRA CUSTODIAL AGREEMENT
The following amendments have been made to the Strong Funds IRA
Disclosure Statement and Custodial Agreement:
Additional language has been added to section 19 in the Disclosure
Statement entitled "Designation of Beneficiary." The following sentences should
be added after the first sentence:
Any new account opened by exchanging money from an existing IRA
account with a valid beneficiary designation will have the same
beneficiary designation as the original account.
Further, Article VIII, section 1, of the IRA Custodial Agreement has
been amended. Paragraph (d) has changed and a new paragraph (e) has been added.
The previous paragraph (e) is now paragraph (f). As amended, these paragraphs
read as follows:
(d) All Investment Company Shares acquired by the Custodian
shall be registered in the name of the Custodian or its
nominee. The Depositor shall be the beneficial owner of all
Investment Company Shares held in the Custodial Account.
(e) The Custodian agrees to forward to the Depositor each
prospectus, report, notice, proxy and related proxy soliciting
materials applicable to Investment Company Shares held in
the Custodial Account received by the Custodian. By
establishing or having established the Custodial Account, the
Depositor affirmatively directs the Custodian to vote any
Investment Company Shares held on the applicable record date
that have not been voted by the Depositor prior to a
shareholder meeting for which prior notice has been given.The
Custodian shall vote with the management of the Investment
Company on each proposal that the Investment Company's Board of
Directors has approved unanimously. If the Investment Company's
Board of Directors has not approved a proposal unanimously, the
Custodian shall vote in proportion to all shares voted by the
Investment Company's shareholders.
(f) [Paragraph previously lettered paragraph (e).] The
Depositor may, at any time, by written notice to the Custodian,
redeem any number of shares held in the Custodial Account
and reinvest the proceeds in the shares of any other Investment
Company. Such redemptions and reinvestments shall be done at
the price and in the manner such shares are then being redeemed
or offered by the respective Investment Companies.
<PAGE> 1
EXHIBIT 99.B18
[Godfrey & Kahn, S.C. Letterhead]
April 14, 1995
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Strong Asset Allocation Fund, Inc.
Gentlemen:
We represent Strong Asset Allocation Fund, Inc. (the "Fund")
in connection with its filing of Post-Effective Amendment No. 20 (the
"Post-Effective Amendment") to the Fund's Registration Statement (Registration
Nos. 2-73968; 811-3256) on Form N-1A under the Securities Act of 1933 (the
"Securities Act") and the Investment Company Act of 1940. The Post-Effective
Amendment is being filed pursuant to Rule 485(b) under the Securities Act. We
have reviewed the Post-Effective Amendment and, in accordance with Rule 485(e)
under the Securities Act, hereby represent that the Post-Effective Amendment
does not contain disclosures which would render it ineligible to become
effective pursuant to Rule 485(b).
Very truly yours,
GODFREY & KAHN, S.C.
/S/ SCOTT A. MOEHRKE
--------------------
Scott A. Moehrke
SAM/ica
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000355414
<NAME> STRONG ASSET ALLOCATION FUND, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 248,156
<INVESTMENTS-AT-VALUE> 247,259
<RECEIVABLES> 2,605
<ASSETS-OTHER> 27
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 249,891
<PAYABLE-FOR-SECURITIES> 881
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 363
<TOTAL-LIABILITIES> 1,244
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 252,310
<SHARES-COMMON-STOCK> 13,879
<SHARES-COMMON-PRIOR> 13,350
<ACCUMULATED-NII-CURRENT> (22)<F3>
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,744)<F3>
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (897)<F3>
<NET-ASSETS> 248,647
<DIVIDEND-INCOME> 2,007
<INTEREST-INCOME> 10,852
<OTHER-INCOME> 0
<EXPENSES-NET> (3,178)<F3>
<NET-INVESTMENT-INCOME> 9,681
<REALIZED-GAINS-CURRENT> (1,157)<F3>
<APPREC-INCREASE-CURRENT> (12,535)<F3>
<NET-CHANGE-FROM-OPS> (4,011)<F3>
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (9,714)<F3>
<DISTRIBUTIONS-OF-GAINS> (2,267)<F3>
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,972
<NUMBER-OF-SHARES-REDEEMED> (3,077)<F3>
<SHARES-REINVESTED> 634
<NET-CHANGE-IN-ASSETS> (5,792)<F3>
<ACCUMULATED-NII-PRIOR> (57)<F3>
<ACCUMULATED-GAINS-PRIOR> 748
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (2,092)<F3>
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (3,178)<F3>
<AVERAGE-NET-ASSETS> 257,544
<PER-SHARE-NAV-BEGIN> 19.06<F1>
<PER-SHARE-NII> 0.70<F1>
<PER-SHARE-GAIN-APPREC> (0.99)<F1>
<PER-SHARE-DIVIDEND> (0.70)<F1>
<PER-SHARE-DISTRIBUTIONS> (0.16)<F1>
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.91<F1>
<EXPENSE-RATIO> 1.2<F2>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Per share amounts not stated in 000's. Debit amounts shown as negative ().
<F2>Stated in percent.
<F3>All debits except assets stated as negative().
</FN>
</TABLE>
